Commonwealth Financing Authority
264
NEW ISSUE-BOOK-ENTRY ONLY Rating: See “RATINGS” herein Interest on the 2013A-1 Bonds is includable in gross income for federal income tax purposes. In the opinion of Bond Counsel, interest on the 2013A-2 Bonds and 2013B Bonds, respectively, will be excluded from gross income for federal income tax purposes under existing statutes, regulations, rulings and court decisions, subject to the conditions described in “TAX MATTERS” herein. In addition interest on the 2013A-2 Bonds and the 2013B Bonds will not be treated as an item of tax preference under Section 57 of the Internal Revenue Code of 1986, as amended (the “Code”) for purposes of the individual and corporate alternative minimum taxes; however, under the Code, such interest may be subject to certain other taxes affecting corporate holders of the 2013A-2 Bonds and the 2013B Bonds. Under the existing laws of the Commonwealth of Pennsylvania, interest on the Series 2013 Bonds will be free from Pennsylvania personal income taxation and Pennsylvania corporate net income taxation but such exemption does not extend to gift, estate, succession or inheritance taxes or any other taxes not levied or assessed directly on the Series 2013 Bonds or the interest thereon. For a more complete discussion, see “TAX MATTERS” herein. $330,000,000 COMMONWEALTH FINANCING AUTHORITY REVENUE BONDS, SERIES 2013 Consisting of $75,000,000 Revenue Bonds (Federally Taxable), Series A-1 of 2013 $48,000,000 Revenue Bonds (Tax-Exempt), Series A-2 of 2013 $207,000,000 Revenue Bonds (Tax-Exempt), Series B of 2013 Dated: Delivery Date Due: June 1, As Shown on Inside Front Cover The Commonwealth Financing Authority (the “Authority”) is issuing its Revenue Bonds in three series consisting of Revenue Bonds (Federally Taxable), Series A-1 of 2013 (the “2013A-1 Bonds”), Revenue Bonds (Tax-Exempt), Series A-2 of 2013 (the “2013A-2 Bonds”) and Revenue Bonds (Tax-Exempt), Series B of 2013 (the “2013B Bonds” and, together with the 2013A-1 Bonds and the 2013A-2 Bonds, the “Series 2013 Bonds”). The 2013A-1 Bonds and the 2013A-2 Bonds (collectively, the “2013A Bonds”) will be issued and secured under the Energy Indenture, as defined herein, between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee to TD Bank, National Association (the “Energy Trustee”). The proceeds of the 2013A Bonds will be applied to (i) provide additional funding for the Alternative Energy Development Program established under the Alternative Energy Investment Act, 73 P.S. § 1649.101 et seq. (the “Alternative Energy Act”), and other Project Costs (as defined herein) for program-related administration, and (ii) pay the costs of issuing the 2013A Bonds. The 2013B Bonds will be issued and secured under the H2O Indenture, as defined herein, between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee to TD Bank, National Association (the “H2O Trustee”). The proceeds of the 2013B Bonds will be applied to (i) provide additional funds for grants to be used to fund water and sewer projects, storm water projects, flood control projects and high hazard unsafe dam projects pursuant to the H2O PA Act, 32 P.S. § 694.101 et seq. (“H2O PA Act”) and certain amendments to Pennsylvania’s Fiscal Code, 72 P.S. §1 et seq. contained in Act No. 50 of the Commonwealth of Pennsylvania (the “Commonwealth”) approved on October 9, 2009, and other Project Costs (as defined herein) for program-related administration, and (ii) pay the costs of issuing the 2013B Bonds. The 2013A Bonds shall be payable from and secured by a lien upon and pledge of the Revenues as defined in the Energy Indenture and as described herein. The Revenues include all amounts payable to the Authority pursuant to the Energy Service Agreement, as defined herein, between the Authority and the Commonwealth, acting through the Department of Community and Economic Development (the “Department”), other than the Service Fee Component constituting Administrative Expenses and the amounts required to be deposited into the Rebate Fund pursuant to the Energy Indenture. The 2013B Bonds shall be payable from and secured by a lien upon and pledge of the Revenues as defined in the H2O Indenture and as described herein. The Revenues securing the 2013B Bonds include all amounts payable to the Authority pursuant to the H2O Service Agreement, as defined herein, between the Authority and the Commonwealth, acting through the Department, other than the Service Fee Component constituting Administrative Expenses and the amounts required to be deposited into the Rebate Fund pursuant to the H2O Indenture. The Energy Service Agreement and the H2O Service Agreement, each require the Department to make payments sufficient to pay the principal of and interest on the applicable Series 2013 Bonds when due, the payments due on other Obligations (defined herein) under the Energy Indenture and the H2O Agreement, respectively, and certain administrative costs of the Authority subject to appropriation, as described herein. The Department has covenanted in the Energy Service Agreement and the H2O Service Agreement that so long as any applicable Series 2013 Bonds remain outstanding, it shall include in its annual budget request an amount sufficient to pay all such amounts due and payable in the related fiscal year. See “SECURITY FOR THE SERIES 2013 BONDS” herein. THE SERIES 2013 BONDS SHALL BE LIMITED OBLIGATIONS OF THE AUTHORITY AND SHALL NOT CONSTITUTE NOR GIVE RISE TO ANY CHARGE AGAINST THE GENERAL CREDIT OF THE AUTHORITY. THE SERIES 2013 BONDS SHALL NOT CONSTITUTE A DEBT, LIABILITY OR OBLIGATION OF THE COMMONWEALTH OR ANY POLITICAL SUBDIVISION THEREOF AND NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE COMMONWEALTH OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE SERIES 2013 BONDS OR THE INTEREST THEREON, NOR SHALL THE AUTHORITY BE OBLIGATED TO PAY THE SERIES 2013 BONDS OR THE INTEREST THEREON EXCEPT FROM THE REVENUES AND FUNDS OF THE AUTHORITY PLEDGED FOR THE PAYMENT THEREOF UNDER THE ENERGY INDENTURE OR THE H2O INDENTURE, AS APPLICABLE. THE PAYMENTS MADE BY THE DEPARTMENT UNDER THE ENERGY SERVICE AGREEMENT AND THE H2O SERVICE AGREEMENT, RESPECTIVELY, SHALL BE SUBJECT TO THE ANNUAL APPROPRIATION OF FUNDS FOR SUCH PURPOSE BY THE PENNSYLVANIA GENERAL ASSEMBLY, AND THERE CAN BE NO ASSURANCE THAT SUCH FUNDS WILL BE APPROPRIATED IN ANY FISCAL YEAR OF THE COMMONWEALTH. THE AUTHORITY HAS NO TAXING POWER. The Series 2013 Bonds will be issued in denominations of $5,000 and any integral multiple thereof. The Series 2013 Bonds are issuable only as fully registered bonds without coupons. The Series 2013 Bonds will be registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”), New York, New York. DTC will act as securities depository (the “Securities Depository”) for the Series 2013 Bonds. Purchasers will not receive certificates representing their ownership interest in the Series 2013 Bonds purchased. The principal of and interest on the Series 2013 Bonds are payable by the Energy Trustee and the H2O Trustee, respectively, to the Securities Depository, which is to remit such principal and interest to its Participants (as defined herein), which are to remit such principal and interest to the Beneficial Owners (as defined herein) of the Series 2013 Bonds, as described herein. See APPENDIX C–“Book-Entry Only System” herein. The Series 2013 Bonds will be subject to redemption prior to maturity as more fully described herein. The Series 2013 Bonds are offered for delivery when, as and if issued by the Authority and received by the Underwriters, subject to prior sale, to withdrawal or modification of the offer without notice, and to the approving opinion of Cozen O’Connor, Philadelphia, Pennsylvania, Bond Counsel. Certain legal matters will be passed upon for the Authority by Buchanan Ingersoll & Rooney PC, Harrisburg, Pennsylvania, and for the Underwriters by their counsel, Eckert Seamans Cherin & Mellott, LLC, Harrisburg, Pennsylvania. Certain legal matters with respect to the obligations of the Commonwealth under the Energy Service Agreement and the H2O Service Agreement will be passed upon by the Office of Chief Counsel for the Department of Community and Economic Development. It is expected that the Series 2013 Bonds will be available for delivery in New York, New York, through the book-entry procedures of DTC, on or about January 23, 2013. RBC CAPITAL MARKETS CITIGROUP PNC CAPITAL MARKETS LLC Dated: January 15, 2013
Transcript of Commonwealth Financing Authority
NEW ISSUE-BOOK-ENTRY ONLY Rating: See “RATINGS” herein
Interest on the 2013A-1 Bonds is includable in gross income for federal income tax purposes. In the opinion of Bond Counsel, interest on the 2013A-2 Bonds and 2013B Bonds, respectively, will be excluded from gross income for federal income tax purposes under existing statutes, regulations, rulings and court decisions, subject to the conditions described in “TAX MATTERS” herein. In addition interest on the 2013A-2 Bonds and the 2013B Bonds will not be treated as an item of tax preference under Section 57 of the Internal Revenue Code of 1986, as amended (the “Code”) for purposes of the individual and corporate alternative minimum taxes; however, under the Code, such interest may be subject to certain other taxes affecting corporate holders of the 2013A-2 Bonds and the 2013B Bonds. Under the existing laws of the Commonwealth of Pennsylvania, interest on the Series 2013 Bonds will be free from Pennsylvania personal income taxation and Pennsylvania corporate net income taxation but such exemption does not extend to gift, estate, succession or inheritance taxes or any other taxes not levied or assessed directly on the Series 2013 Bonds or the interest thereon. For a more complete discussion, see “TAX MATTERS” herein.
$330,000,000COMMONWEALTH FINANCING AUTHORITY
REVENUE BONDS, SERIES 2013Consisting of
$75,000,000Revenue Bonds (Federally Taxable),
Series A-1 of 2013
$48,000,000Revenue Bonds (Tax-Exempt),
Series A-2 of 2013
$207,000,000Revenue Bonds (Tax-Exempt),
Series B of 2013Dated: Delivery Date Due: June 1, As Shown on Inside Front Cover
The Commonwealth Financing Authority (the “Authority”) is issuing its Revenue Bonds in three series consisting of Revenue Bonds (Federally Taxable), Series A-1 of 2013 (the “2013A-1 Bonds”), Revenue Bonds (Tax-Exempt), Series A-2 of 2013 (the “2013A-2 Bonds”) and Revenue Bonds (Tax-Exempt), Series B of 2013 (the “2013B Bonds” and, together with the 2013A-1 Bonds and the 2013A-2 Bonds, the “Series 2013 Bonds”).
The 2013A-1 Bonds and the 2013A-2 Bonds (collectively, the “2013A Bonds”) will be issued and secured under the Energy Indenture, as defined herein, between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee to TD Bank, National Association (the “Energy Trustee”). The proceeds of the 2013A Bonds will be applied to (i) provide additional funding for the Alternative Energy Development Program established under the Alternative Energy Investment Act, 73 P.S. § 1649.101 et seq. (the “Alternative Energy Act”), and other Project Costs (as defined herein) for program-related administration, and (ii) pay the costs of issuing the 2013A Bonds.
The 2013B Bonds will be issued and secured under the H2O Indenture, as defined herein, between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee to TD Bank, National Association (the “H2O Trustee”). The proceeds of the 2013B Bonds will be applied to (i) provide additional funds for grants to be used to fund water and sewer projects, storm water projects, flood control projects and high hazard unsafe dam projects pursuant to the H2O PA Act, 32 P.S. § 694.101 et seq. (“H2O PA Act”) and certain amendments to Pennsylvania’s Fiscal Code, 72 P.S. §1 et seq. contained in Act No. 50 of the Commonwealth of Pennsylvania (the “Commonwealth”) approved on October 9, 2009, and other Project Costs (as defined herein) for program-related administration, and (ii) pay the costs of issuing the 2013B Bonds.
The 2013A Bonds shall be payable from and secured by a lien upon and pledge of the Revenues as defined in the Energy Indenture and as described herein. The Revenues include all amounts payable to the Authority pursuant to the Energy Service Agreement, as defined herein, between the Authority and the Commonwealth, acting through the Department of Community and Economic Development (the “Department”), other than the Service Fee Component constituting Administrative Expenses and the amounts required to be deposited into the Rebate Fund pursuant to the Energy Indenture.
The 2013B Bonds shall be payable from and secured by a lien upon and pledge of the Revenues as defined in the H2O Indenture and as described herein. The Revenues securing the 2013B Bonds include all amounts payable to the Authority pursuant to the H2O Service Agreement, as defined herein, between the Authority and the Commonwealth, acting through the Department, other than the Service Fee Component constituting Administrative Expenses and the amounts required to be deposited into the Rebate Fund pursuant to the H2O Indenture.
The Energy Service Agreement and the H2O Service Agreement, each require the Department to make payments sufficient to pay the principal of and interest on the applicable Series 2013 Bonds when due, the payments due on other Obligations (defined herein) under the Energy Indenture and the H2O Agreement, respectively, and certain administrative costs of the Authority subject to appropriation, as described herein. The Department has covenanted in the Energy Service Agreement and the H2O Service Agreement that so long as any applicable Series 2013 Bonds remain outstanding, it shall include in its annual budget request an amount sufficient to pay all such amounts due and payable in the related fiscal year. See “SECURITY FOR THE SERIES 2013 BONDS” herein.
THE SERIES 2013 BONDS SHALL BE LIMITED OBLIGATIONS OF THE AUTHORITY AND SHALL NOT CONSTITUTE NOR GIVE RISE TO ANY CHARGE AGAINST THE GENERAL CREDIT OF THE AUTHORITY. THE SERIES 2013 BONDS SHALL NOT CONSTITUTE A DEBT, LIABILITY OR OBLIGATION OF THE COMMONWEALTH OR ANY POLITICAL SUBDIVISION THEREOF AND NEITHER THE FULL FAITH AND CREDIT NOR THE TAXING POWER OF THE COMMONWEALTH OR ANY POLITICAL SUBDIVISION THEREOF IS PLEDGED TO THE PAYMENT OF THE SERIES 2013 BONDS OR THE INTEREST THEREON, NOR SHALL THE AUTHORITY BE OBLIGATED TO PAY THE SERIES 2013 BONDS OR THE INTEREST THEREON EXCEPT FROM THE REVENUES AND FUNDS OF THE AUTHORITY PLEDGED FOR THE PAYMENT THEREOF UNDER THE ENERGY INDENTURE OR THE H2O INDENTURE, AS APPLICABLE. THE PAYMENTS MADE BY THE DEPARTMENT UNDER THE ENERGY SERVICE AGREEMENT AND THE H2O SERVICE AGREEMENT, RESPECTIVELY, SHALL BE SUBJECT TO THE ANNUAL APPROPRIATION OF FUNDS FOR SUCH PURPOSE BY THE PENNSYLVANIA GENERAL ASSEMBLY, AND THERE CAN BE NO ASSURANCE THAT SUCH FUNDS WILL BE APPROPRIATED IN ANY FISCAL YEAR OF THE COMMONWEALTH. THE AUTHORITY HAS NO TAXING POWER.
The Series 2013 Bonds will be issued in denominations of $5,000 and any integral multiple thereof. The Series 2013 Bonds are issuable only as fully registered bonds without coupons. The Series 2013 Bonds will be registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”), New York, New York. DTC will act as securities depository (the “Securities Depository”) for the Series 2013 Bonds. Purchasers will not receive certificates representing their ownership interest in the Series 2013 Bonds purchased. The principal of and interest on the Series 2013 Bonds are payable by the Energy Trustee and the H2O Trustee, respectively, to the Securities Depository, which is to remit such principal and interest to its Participants (as defined herein), which are to remit such principal and interest to the Beneficial Owners (as defined herein) of the Series 2013 Bonds, as described herein. See APPENDIX C–“Book-Entry Only System” herein.
The Series 2013 Bonds will be subject to redemption prior to maturity as more fully described herein.
The Series 2013 Bonds are offered for delivery when, as and if issued by the Authority and received by the Underwriters, subject to prior sale, to withdrawal or modification of the offer without notice, and to the approving opinion of Cozen O’Connor, Philadelphia, Pennsylvania, Bond Counsel. Certain legal matters will be passed upon for the Authority by Buchanan Ingersoll & Rooney PC, Harrisburg, Pennsylvania, and for the Underwriters by their counsel, Eckert Seamans Cherin & Mellott, LLC, Harrisburg, Pennsylvania. Certain legal matters with respect to the obligations of the Commonwealth under the Energy Service Agreement and the H2O Service Agreement will be passed upon by the Office of Chief Counsel for the Department of Community and Economic Development. It is expected that the Series 2013 Bonds will be available for delivery in New York, New York, through the book-entry procedures of DTC, on or about January 23, 2013.
RBC CAPITAL MARKETSCITIGROUP PNC CAPITAL MARKETS LLCDated: January 15, 2013
$330,000,000
COMMONWEALTH FINANCING AUTHORITY REVENUE BONDS, SERIES 2013
Consisting of
$75,000,000 Revenue Bonds (Federally Taxable),
Series A-1 of 2013
Maturity (June 1)
Par Amount
Interest
Rate
Yield
Initial
Offering Price
CUSIP* 2014 $ 3,490,000 0.545% 0.545% 100.000 20281PGB2 2015 4,995,000 0.745% 0.745% 100.000 20281PGC0 2016 5,030,000 1.159% 1.159% 100.000 20281PGD8 2017 5,090,000 1.492% 1.492% 100.000 20281PGE6 2018 5,165,000 1.792% 1.792% 100.000 20281PGF3 2019 5,260,000 2.128% 2.128% 100.000 20281PGG1 2020 5,370,000 2.428% 2.428% 100.000 20281PGH9 2021 5,500,000 2.675% 2.675% 100.000 20281PGJ5 2022 5,650,000 2.875% 2.875% 100.000 20281PGK2 2023 5,810,000 3.075% 3.075% 100.000 20281PGL0 2024 5,990,000 3.225% 3.225% 100.000 20281PGM8 2025 6,185,000 3.325% 3.325% 100.000 20281PGN6 2026 6,390,000 3.425% 3.425% 100.000 20281PGP1 2027 5,075,000 3.525% 3.525% 100.000 20281PGQ9
$48,000,000 Revenue Bonds (Tax-Exempt),
Series A-2 of 2013
Maturity (June 1)
Par Amount
Interest
Rate
Yield
Initial
Offering Price
CUSIP* 2027 $ 1,300,000 3.000% 3.000% 100.000 20281PES7 2028 6,865,000 5.000% 2.790%C 118.083C 20281PET5 2029 7,210,000 5.000% 2.850%C 117.543C 20281PEU2 2030 7,570,000 5.000% 2.890%C 117.185C 20281PEV0 2031 7,950,000 5.000% 2.930%C 116.827C 20281PEW8 2032 8,345,000 5.000% 2.970%C 116.471C 20281PEX6 2033 8,760,000 5.000% 3.050%C 115.763C 20281PEY4
* The above CUSIP (Committee on Uniform Securities Identification Procedures) numbers have been assigned by an organization not affiliated with the
Authority or the Underwriters, and such parties are not responsible for the selection or use of the CUSIP numbers. The CUSIP numbers are included solely for the convenience of bondholders and no representation is made as to the correctness of such CUSIP numbers. CUSIP numbers assigned to securities may be changed during the term of such securities based on a number of factors including, but not limited to, the refunding or defeasance of such issue or the use of secondary market financial products. None of the Authority or the Underwriters has agreed to, and there is no duty or obligation to, update this Official Statement to reflect any change or correction in the CUSIP numbers set forth above.
C
Price/Yield to earliest call date.
$207,000,000
Revenue Bonds (Tax-Exempt), Series B of 2013
Maturity (June 1)
Par Amount
Interest
Rate
Yield
Initial
Offering Price
CUSIP* 2014 $ 90,000 3.000% 0.590% 103.248 20281PEZ1 2015 3,685,000 4.000% 0.670% 107.768 20281PFA5 2016 3,835,000 4.000% 0.860% 110.363 20281PFB3 2017 3,990,000 4.000% 1.040% 112.571 20281PFC1 2018 4,145,000 5.000% 1.260% 119.308 20281PFD9 2019 4,355,000 5.000% 1.440% 121.545 20281PFE7 2020 300,000 2.000% 1.700% 102.065 20281PFF4 2020 4,270,000 5.000% 1.700% 122.724 20281PGA4 2021 4,790,000 5.000% 1.900% 123.844 20281PFG2 2022 5,030,000 5.000% 2.100% 124.513 20281PFH0 2023 5,280,000 5.000% 2.270%C 122.891C 20281PFJ6 2024 1,425,000 2.500% 2.460%C 100.330C 20281PFK3 2024 4,120,000 5.000% 2.430%C 121.387C 20281PFV9 2025 5,790,000 5.000% 2.530%C 120.459C 20281PFL1 2026 6,080,000 5.000% 2.610%C 119.722C 20281PFM9 2027 1,180,000 3.000% 3.000% 100.000 20281PFN7 2027 5,200,000 5.000% 2.720%C 118.717C 20281PFZ0 2028 6,675,000 5.000% 2.790%C 118.083C 20281PFP2 2029 7,010,000 5.000% 2.850%C 117.543C 20281PFQ0 2030 7,360,000 5.000% 2.890%C 117.185C 20281PFR8 2031 7,730,000 5.000% 2.930%C 116.827C 20281PFS6 2032 8,115,000 5.000% 2.970%C 116.471C 20281PFT4 2033 3,475,000 3.375% 3.390% 99.777 20281PFW7 2033 5,045,000 5.000% 3.050%C 115.763C 20281PFX5
$28,025,000 5.000% Term Bond due June 1, 2036, Yield 3.150%C, Price 114.886C, CUSIP 20281PFY3* $70,000,000 5.000% Term Bond due June 1, 2042, Yield 3.310%C, Price 113.497C, CUSIP 20281PFU1*
* The above CUSIP (Committee on Uniform Securities Identification Procedures) numbers have been assigned by an organization not affiliated with the
Authority or the Underwriters, and such parties are not responsible for the selection or use of the CUSIP numbers. The CUSIP numbers are included solely for the convenience of bondholders and no representation is made as to the correctness of such CUSIP numbers. CUSIP numbers assigned to securities may be changed during the term of such securities based on a number of factors including, but not limited to, the refunding or defeasance of such issue or the use of secondary market financial products. None of the Authority or the Underwriters has agreed to, and there is no duty or obligation to, update this Official Statement to reflect any change or correction in the CUSIP numbers set forth above.
C
Price/Yield to earliest call date.
COMMONWEALTH FINANCING AUTHORITY
400 N. Fourth Street, 4th Floor Harrisburg, Pennsylvania 17120
C. Alan Walker, Chair Secretary of Community and Economic Development
Glenn E. Moyer
Secretary of Banking
Charles Zogby Secretary of the Budget
Austin J. Burke Appointed by The Minority Leader of the
Senate
John J. Verbanac Appointed by the President Pro Tempore of the
Senate
Michael Karp Appointed by the Speaker of the House of
Representatives
Barbara A. McNees Appointed by the House Minority Leader
No dealer, broker, salesperson or other person has been authorized by the Authority or the Underwriters to give any information or to make any representations with respect to the Series 2013 Bonds other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the Series 2013 Bonds in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. Neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the parties referred to above since the date hereof. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2013 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITERS MAY OFFER AND SELL THE SERIES 2013 BONDS TO CERTAIN DEALERS AND CERTAIN DEALER BANKS AND BANKS AND OTHERS ACTING AS AGENTS AT PRICES LOWER THAN THE OFFERING PRICE STATED ON THE COVER PAGE HEREOF, AND SAID OFFERING PRICE MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITERS. IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE AUTHORITY, THE COMMONWEALTH AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Except as otherwise noted, the information herein speaks as of its date and is as of the date of this Official Statement and is subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, in any circumstances, create any implication that there has been no change in the affairs of the Authority or the Commonwealth since the date hereof. If and when included in this Official Statement, the words "expects," "forecasts," "projects," "intends," "anticipates," "estimates," "assumes" and analogous expressions are intended to identify forward-looking statements and any such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those that have been projected. Such risks and uncertainties which could affect the revenues and obligations of the Authority include, among others, changes in economic conditions, mandates from other governments and various other events, conditions and circumstances, many of which are beyond the control of the Authority. Such forward-looking statements speak only as of the date of this Official Statement. The Authority disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any changes in the Authority’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The order and placement of the information this Official Statement, including the Appendices hereto and the information incorporated herein by reference, are not to be deemed to be a determination of relevance, materiality or importance, and this Official Statement, including the Appendices, and the information incorporated herein by reference, must be considered in its entirety.
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i
TABLE OF CONTENTS
INTRODUCTORY STATEMENT ....................................................................................................................................... 1 COMMONWEALTH FINANCING AUTHORITY ................................................................................................................ 2 ALTERNATIVE ENERGY ACT ........................................................................................................................................ 2 H2O PA ACT ................................................................................................................................................................. 3 PLAN OF FINANCE ......................................................................................................................................................... 3 ESTIMATED SOURCES AND USES OF FUNDS ................................................................................................................. 4 DESCRIPTION OF THE SERIES 2013 BONDS .................................................................................................................. 4
REDEMPTION .............................................................................................................................................................. 5 SECURITY FOR THE SERIES 2013 BONDS ...................................................................................................................... 8
LIMITED OBLIGATION OF THE AUTHORITY ................................................................................................................. 8 ENERGY SERVICE AGREEMENT .................................................................................................................................. 8 H2O SERVICE AGREEMENT ........................................................................................................................................ 9 HISTORICAL APPROPRIATION TO THE AUTHORITY ................................................................................................... 10 COMMONWEALTH INFORMATION ............................................................................................................................. 10 REVENUE PLEDGE .................................................................................................................................................... 11 DEFEASANCE ............................................................................................................................................................ 11 THE BUDGETARY PROCESS ...................................................................................................................................... 11 ADDITIONAL BONDS AND FINANCING FACILITY OBLIGATIONS ................................................................................ 13
DEBT SERVICE REQUIREMENTS ................................................................................................................................. 14 ENERGY BONDS........................................................................................................................................................ 14 H2O BONDS ............................................................................................................................................................. 15
TAX MATTERS ............................................................................................................................................................ 16 FEDERAL TAX EXEMPTION - 2013A-1 BONDS .......................................................................................................... 16 FEDERAL TAX EXEMPTION – 2013A-2 BONDS AND 2013B BONDS .......................................................................... 16 STATE TAX EXEMPTION - SERIES 2013 BONDS ........................................................................................................ 17
LITIGATION ................................................................................................................................................................. 17 UNDERWRITING .......................................................................................................................................................... 17 RATINGS ...................................................................................................................................................................... 18 LEGAL MATTERS ........................................................................................................................................................ 18 FINANCIAL ADVISOR .................................................................................................................................................. 18 CERTAIN RELATIONSHIPS .......................................................................................................................................... 18 LIMITATIONS OF RIGHTS AND REMEDIES UNDER FEDERAL BANKRUPTCY CODE .................................................. 19 UNDERTAKING TO PROVIDE CONTINUING DISCLOSURE ........................................................................................... 19 MISCELLANEOUS ........................................................................................................................................................ 19 APPENDIX A: FINANCIAL AND OTHER INFORMATION RELATING TO THE COMMONWEALTH APPENDIX B-1: DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF
THE ENERGY INDENTURE APPENDIX B-2: DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF
THE H2O INDENTURE APPENDIX C: BOOK-ENTRY ONLY SYSTEM APPENDIX D-1: FORM OF ENERGY SERVICE AGREEMENT APPENDIX D-2: FORM OF H2O SERVICE AGREEMENT APPENDIX E-1: FORM OF OPINION OF BOND COUNSEL FOR 2013A BONDS APPENDIX E-2: FORM OF OPINION OF BOND COUNSEL FOR 2013B BONDS APPENDIX F: FORM OF CONTINUING DISCLOSURE AGREEMENT
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1
$330,000,000
COMMONWEALTH FINANCING AUTHORITY REVENUE BONDS, SERIES 2013
Consisting of
$75,000,000 Revenue Bonds (Federally Taxable),
Series A-1 of 2013
$48,000,000 Revenue Bonds (Tax-Exempt),
Series A-2 of 2013
$207,000,000 Revenue Bonds (Tax-Exempt),
Series B of 2013
INTRODUCTORY STATEMENT The purpose of this Official Statement is to provide certain information concerning the $330,000,000
aggregate principal amount of Commonwealth Financing Authority Revenue Bonds, Series 2013, consisting of $75,000,000 aggregate principal amount of Revenue Bonds (Federally Taxable), Series A-1 of 2013 (the “2013A-1 Bonds”), $48,000,000 aggregate principal amount of Revenue Bonds (Tax-Exempt), Series A-2 of 2013 (the “2013A-2 Bonds” and, together with the 2013A-1 Bonds, the “2013A Bonds”) and $207,000,000 aggregate principal amount of Revenue Bonds (Tax-Exempt), Series B of 2013 (the “2013B Bonds” and, together with the 2013A Bonds, the “Series 2013 Bonds”). The 2013A Bonds are to be issued by the Commonwealth Financing Authority (the “Authority”) to (i) provide additional funding for the Alternative Energy Development Program established under the Alternative Energy Investment Act, 73 P.S. § 1649.101 et seq. (the “Alternative Energy Act”), and other Project Costs (as defined herein) for program-related administration, and (ii) pay the costs of issuing the 2013A Bonds. The 2013A Bonds are being issued pursuant to the provisions of 64 Pa. C.S. §1501 et seq. (the “Act”), the Alternative Energy Act, a resolution (the “Resolution”) of the Authority adopted on January 25, 2012 and a Trust Indenture dated as of May 1, 2009 (the “Initial Energy Indenture”), as previously supplemented by a First Supplemental Trust Indenture dated as of April 15, 2010 (the “First Supplemental Energy Indenture”), and as further supplemented and amended by a Second Supplemental Trust Indenture dated as of January 1, 2013 (the “Second Supplemental Energy Indenture” and together with the Initial Energy Indenture and the First Supplemental Energy Indenture, collectively, the “Energy Indenture”), between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee to TD Bank, National Association (the “Energy Trustee”). Capitalized terms used in this Official Statement with respect to the 2013A Bonds and not otherwise defined herein have the respective meanings set forth in APPENDIX B-1–“DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE ENERGY INDENTURE”. The 2013B Bonds are to be issued by the Authority to (i) provide additional funds for grants to be used to fund water and sewer projects, storm water projects, flood control projects and high hazard unsafe dam projects (the “H2O Grant Program”) pursuant to the H2O PA Act, 32 P.S. § 694.101 et seq. (“H2O PA Act”) and certain amendments to Pennsylvania’s Fiscal Code, 72 P.S. §1 et seq. contained in Act No. 50 of the Commonwealth of Pennsylvania (the “Commonwealth”) approved on October 9, 2009 (“Act 50”), and other Project Costs (as defined herein) for program-related administration, and (ii) pay the costs of issuing the 2013B Bonds. The 2013B Bonds are being issued pursuant to the Act, the H2O PA Act, Act 50, the Resolution and a Trust Indenture dated as of November 1, 2009 (the “Initial H2O Indenture”), as previously supplemented by a First Supplemental Indenture dated as of September 1, 2010 (the “First Supplemental H2O Indenture”), and as further supplemented and amended by a Second Supplemental Trust Indenture dated as of January 1, 2013 (the “Second Supplemental H2O Indenture” and together with the Initial H2O Indenture and the First Supplemental H2O Indenture, collectively, the “H2O Indenture”), between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee to TD Bank, National Association (the “H2O Trustee”). Capitalized terms used in this Official Statement with respect to the 2013B Bonds and not otherwise defined herein have the respective meanings set forth in APPENDIX B-2–“DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE H2O INDENTURE”.
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COMMONWEALTH FINANCING AUTHORITY The Authority was established in April 2004 with the enactment of the Act as an independent authority and an instrumentality of the Commonwealth whose purpose is to promote the health, safety, employment, business opportunities, economic activity and general welfare of the Commonwealth and its citizens through loans, grants, guarantees, leases, lines and letters of credit and other financing arrangements to benefit both for-profit and non-profit entities. The Authority is authorized to issue its limited obligation revenue bonds and other types of limited obligation revenue financing to provide funding for certain activities of the Commonwealth’s economic stimulus program and as otherwise authorized, including by the Alternative Energy Act and the H2O PA Act. The Authority’s bonds and finances are to be secured by revenues and accounts of the Authority, including funds appropriated to the Authority from general revenues of the Commonwealth for repayment of Authority obligations. The Authority has no power to pledge the credit or taxing power of the Commonwealth or any political subdivision thereof. No obligations of the Authority shall be deemed to be obligations of the Commonwealth or any political subdivision thereof. The Authority has no taxing power. The Authority has a number of other bond issues outstanding and may issue others from time to time. Other than Additional Bonds, such bonds are issued under indentures other than the Energy Indenture and the H2O Indenture and are secured separately from the Series 2013 Bonds. The Act provides that the powers of the Authority shall be exercised by a governing body composed of seven members, consisting of the Secretary of Community and Economic Development or a designee, the Secretary of the Budget or a designee, the Secretary of Banking or a designee, and four legislative appointees, one of whom shall be appointed by each of the President Pro Tempore of the Senate, the Minority Leader of the Senate, the Speaker of the House of Representatives and the Minority Leader of the House of Representatives. All legislative appointees serve at the pleasure of their respective appointing authorities.
ALTERNATIVE ENERGY ACT
The Alternative Energy Act establishes the Alternative Energy Development Program which includes:
• Funds for the Ben Franklin Technology Development Authority (the “Ben Franklin Authority”) to be used for energy-related investments to support early-stage activities to develop and implement alternative energy and energy efficiency technologies.
• Grants to certain coal electric generating or cogeneration units for pollution control projects
(administered by the Pennsylvania Department of Environmental Protection (the “PA DEP”)).
• An annual deposit to the Emergency Energy Assistance Fund held by the Pennsylvania Department of Public Welfare.
• Grants, loans, reimbursements or rebates to individual residents or small businesses for solar
energy projects (administered by the PA DEP).
• Loans or grants by the Authority for clean energy projects, alternative energy production projects, geothermal technologies, wind energy projects, high performance buildings and solar energy projects. Recipients, depending on the project, can include individuals, businesses, political subdivisions and nonprofit economic development organizations.
In order to finance the Alternative Energy Development Program, the Alternative Energy Act provides for the Authority to incur indebtedness in an amount up to $500 million (plus payment of all reasonable costs and expenses related to the issuance of such indebtedness) and for the annual appropriation of up to $40 million per fiscal year through the 2037-2038 fiscal year to pay debt service on such indebtedness. The Authority previously issued its Fixed Rate (Federally Taxable) Revenue Bonds, Series A of 2009, in the aggregate principal amount of $50,000,000, its Fixed Rate (Tax-Exempt) Revenue Bonds, Series B of 2009, in the aggregate principal amount of $50,000,000, its Fixed Rate (Federally Taxable) Revenue Bonds, Series A of 2010, in the aggregate principal
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amount of $62,000,000 and its Fixed Rate (Tax-Exempt) Revenue Bonds, Series B of 2010, in the aggregate principal amount of $80,000,000 (collectively, the “Prior Energy Bonds”), under the provisions of the Alternative Energy Act. The 2013A-1 and 2013A-2 Bonds represent additional authorized indebtedness for the Alternative Energy Development Program. See Appendix A hereto, entitled “FINANCIAL AND OTHER INFORMATION RELATING TO THE COMMONWEALTH” for additional information on the Authority and the funding of the Alternative Energy Development Program.
H2O PA ACT The H2O PA Act authorizes the Authority to incur indebtedness to provide single-year or multiyear grants to Eligible Applicants for the acquisition, construction, improvement, including the installation of security measures, expansion, repair or rehabilitation of all or part of a water supply system, sewage disposal system, storm water system, flood control system or high hazard unsafe dam (collectively, the “H2O Grant Program”). Eligible Applicants, as defined in the H2O PA Act as modified by Act 50, are the Commonwealth, an independent agency, one or more municipalities or municipal authorities or certain not-for-profit organizations (all subject to certain limitations); provided, however, the Commonwealth or an independent agency shall only be an Eligible Applicant for high hazard unsafe dam and flood control projects, and a not-for-profit organization shall only be an Eligible Applicant for high hazard unsafe dam projects. In order to finance the H2O Grant Program, the H2O PA Act provides for the Authority to incur indebtedness in an amount up to $800 million in accordance with the provisions of the Act. The Authority previously issued its Revenue Bonds, Series D of 2009 (Federally Taxable – Build America Bonds), in the aggregate principal amount of $400,000,000, its Revenue Bonds, Series C-1 of 2010 (Tax-Exempt), in the aggregate principal amount of $53,080,000 and its Revenue Bonds, Series C-2 of 2010 (Federally Taxable – Build America Bonds), in the aggregate principal amount of $96,920,000 (collectively, the “Prior H2O Bonds”), under the provisions of the H2O PA Act. The 2013B Bonds represent additional authorized indebtedness under the H2O PA Act to be issued by the Authority. The Act of February 14, 2012, P.L. 87, No. 13 of the Commonwealth imposed a fee on producers authorized to drill gas wells for the production of natural gas from unconventional formations. The gas well fee is payable annually, a portion of which is to be deposited into a Marcellus Legacy Fund established under said Act. Said Act provides that moneys in the Marcellus Legacy Fund are to be available, in part, to the Authority to support the H2O Grant Program. Although not pledged as security for the bonds issued under the H2O Indenture, as authorized by state law, moneys allocated to the Authority pursuant to the H2O PA Act from the Pennsylvania Gaming Economic Development and Tourism Fund, to the extent not encumbered by the Pennsylvania Gaming Economic Development and Tourism Fund Capital Budget Itemization Act of 2007 (Act of July 25, 2007, P.L. 342, No. 53) have been used as the first source of funds (prior to the Commonwealth’s General Fund) to make the required Service Fee payments under the H2O Service Agreement. See APPENDIX A hereto, entitled “FINANCIAL AND OTHER INFORMATION RELATING TO THE COMMONWEALTH” for additional information on the Authority and the funding of the H2O Grant Program.
PLAN OF FINANCE The proceeds from the sale of the 2013A-1 Bonds and the 2013A-2 Bonds will be used to (i) to provide additional funding for the Alternative Energy Development Program authorized by the Alternative Energy Act and other Project Costs (as defined herein) for program-related administration, and (ii) pay the costs of issuing the 2013A-1 Bonds and the 2013A-2 Bonds. The Authority expects to incur additional indebtedness as proceeds of the Prior Energy Bonds and the 2013A-1 Bonds and 2013A-2 Bonds are expended and committed for eligible projects
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under the Alternative Energy Development Program up to the maximum indebtedness authorized for the Alternative Energy Development Program under the Alternative Energy Act in an amount of $500 million plus the payment of all reasonable costs and expenses related to the issuance of such indebtedness. The proceeds from the sale of the 2013B Bonds will be used to (i) provide additional funding for the H2O Grant Program authorized by the H2O PA Act and other Project Costs (as defined herein) for program-related administration, and (ii) pay the costs of issuing the 2013B Bonds. The Authority expects to incur additional indebtedness as proceeds of the Prior H2O Bonds and the 2013B Bonds are expended and committed for the H2O Grant Program up to the maximum $800 million indebtedness authorized therefor under the H2O PA Act.
ESTIMATED SOURCES AND USES OF FUNDS The following are the expected sources and uses of funds with respect to the issuance of the Series 2013 Bonds: SOURCES: 2013A-1 2013A-2 2013B Total Par Amount of Bonds: $ 75,000,000.00 $ 48,000,000.00 $ 207,000,000.00 $ 330,000,000.00 Net Original Issue Premium/(Discount) 0.00 7,900,243.00 32,476,034.90 40,376,277.90 Total Sources: $ 75,000,000.00 $ 55,900,243.00 $ 239,476,034.90 $ 370,376,277.90 USES: Deposit to Project Funds $ 74,532,487.01 $ 55,560,349.09 $ 238,225,901.14 $ 368,318,737.24 Costs of Issuance* 467,512.99 339,893.91 1,250,133.76 2,057,540.66 Total Uses: $ 75,000,000.00 $ 55,900,243.00 $ 239,476,034.90 $ 370,376,277.90 ________________________ * Includes Underwriters’ discount, legal fees and other costs of issuance.
DESCRIPTION OF THE SERIES 2013 BONDS The 2013A-1 Bonds and the 2013A-2 Bonds are being issued by the Authority under the Act, the Alternative Energy Act and the Resolution and pursuant to the Energy Indenture in two series, both of which will be dated the date of issuance. The 2013B Bonds are being issued by the Authority under the Act, the H2O PA Act, Act 50 and the Resolution and pursuant to the H2O Indenture in a single series, which will be dated the date of issuance. The 2013A-1 Bonds, the 2013A-2 Bonds and the 2013B Bonds will bear interest from such date payable on June 1 and December 1 of each year (each, an “Interest Payment Date”), commencing December 1, 2013, until maturity or prior redemption. The 2013A-1 Bonds, the 2013A-2 Bonds and the 2013B Bonds will mature in the amounts and on the dates, and bear interest at the rates, set forth on the inside cover page hereof. The 2013A-1 Bonds, the 2013A-2 Bonds and the 2013B Bonds will be subject to the redemption provisions set forth herein. The Series 2013 Bonds will be issued in fully registered form in denominations of $5,000 or any integral multiple thereof. As provided in the Energy Indenture and the H2O Indenture, as applicable, the principal or redemption price of the Series 2013 Bonds is payable at the designated payment office of the Energy Trustee or the H2O Trustee, as applicable, located in Philadelphia, Pennsylvania. Interest on the Series 2013 Bonds shall be paid to the person whose name appears on the bond registration books of the Energy Trustee and the H2O Trustee, as applicable, as the holder thereof as of the close of business on the Record Date for each Interest Payment Date. Payment of the interest on the Series 2013 Bonds shall be made by check mailed by first class mail to such holder at its address as it appears on such registration books, or, upon the written request of any holder of at least $1,000,000 in aggregate principal amount of the 2013A Bonds or the 2013B Bonds, as applicable, submitted to the Energy Trustee or the H2O Trustee, as applicable, at least one business day prior to the Record Date, by wire transfer in immediately available funds to an account within the United States designated by such holder. The Record Date shall be the 15th day (whether or not a business day) of the month immediately preceding each Interest Payment Date. If the Authority defaults in the payment of interest due on any Interest Payment Date, defaulted interest will be payable to the person in whose name such Series 2013 Bond is registered at the close of business on a special record
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date for the payment of such defaulted interest established by notice mailed by the Energy Trustee or the H2O Trustee, as applicable, to the Bondholders not less than ten days prior to such special record date. Such notice of the special record date will be mailed to the persons in whose names the Series 2013 Bonds are registered at the close of business on the 5th day preceding the date of mailing. Interest on the Series 2013 Bonds will be computed on the basis of a 360 day year of twelve 30-day months. Upon original issuance, the Series 2013 Bonds will be registered in the name of and held by Cede & Co., as registered holder and nominee for DTC. DTC will act as a securities depository for the Series 2013 Bonds. Purchases of the Series 2013 Bonds will initially be made in book-entry form. See APPENDIX C–“Book-Entry Only System” herein. As long as the Series 2013 Bonds are registered in the name of DTC or its nominee, Cede & Co., payments of the principal of, redemption premium, if any, and interest on the Series 2013 Bonds will be paid directly to Cede & Co. by wire transfer by The Bank of New York Mellon Trust Company, N.A., Philadelphia, Pennsylvania, as Paying Agent (the “Paying Agent”) on each Interest Payment Date. While the book-entry only system is in effect, transfers and exchanges of the Series 2013 Bonds will be effected through DTC’s book-entry system. Redemption Optional Redemption – 2013A-1 Bonds The 2013A-1 Bonds of each maturity shall be subject to redemption either in whole or in part, at the option of the Authority, at any time, at a redemption price equal to the greater of (i) 100% of the principal amount thereof or (ii) the Discounted Value thereof, plus in either case, accrued interest thereon to the date of redemption. The 2013A-1 Bonds may be redeemed in any order of maturity and in any principal amount within a maturity as selected by the Authority in its sole discretion. All calculations and determinations referred to under this caption “Optional Redemption – 2013A-1 Bonds” , except as provided in the preceding sentence, are expected (but not required) to be made by a financial advisor or other agent selected by the Authority for such purposes (the “Calculation Agent”). “Discounted Value” means, with respect to each outstanding maturity of the 2013A-1 Bonds to be redeemed, the sum as determined by the Authority or the Calculation Agent of the amounts obtained by discounting all remaining scheduled payments of principal and interest (exclusive of interest accrued to the date of redemption) on such maturity from their respective scheduled payment dates to the applicable redemption date, at a yield (computed on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months) equal to the applicable Discount Yield. “Discount Yield” means, with respect to each maturity of the 2013A-1 Bonds to be redeemed on a particular date, the Blended Treasury Yield determined by the Authority or the Calculation Agent with respect to the 2013A-1 Bonds and maturity to be redeemed, plus 20 basis points. The Discount Yield will be calculated assuming semi-annual compounding based upon a 360-day year consisting of twelve 30-day months. “Blended Treasury Yield” means, with respect to the 2013A-1 Bonds of a particular maturity, the yield computed by the Authority or the Calculation Agent as the linear interpolation of two Market Treasury Yields such that the theoretical maturity that corresponds to the interpolated Market Treasury Yield equals the date that corresponds to the remaining average life of the 2013A-1 Bonds and maturity to be redeemed. The first Market Treasury Yield shall be based on an actively traded U.S. Treasury security or U.S. Treasury index whose maturity is closest to but no later than the date corresponding to the remaining average life of the 2013A-1 Bonds and maturity to be redeemed; the second Market Treasury Yield shall be based on an actively traded U.S. Treasury security or U.S. Treasury index whose maturity is closest to but no earlier than the date corresponding to the remaining average life of the 2013A-1 Bonds and maturity to be redeemed. “Market Treasury Yield” means that yield, as determined by the Authority or the Calculation Agent, assuming semi-annual compounding based upon a 360-day year consisting of twelve 30-day months, which is equal to:
(i) the yield for the applicable maturity of an actively traded U.S. Treasury security, reported, as of 11:00 a.m., New York City time, on the Valuation Date on the display designated as “Page PX1” of the Bloomberg
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Financial Markets Services Screen (or, if not available, any other nationally recognized trading screen reporting on-line intraday trading in U.S. Treasury securities); or
(ii) if the yield described in (i) above is not reported as of such time or the yield reported as of such time is not ascertainable, the most recent yield data for the applicable U.S. Treasury maturity index from the federal Reserve Statistical Release H.15 Daily Update (or any comparable or successor publication) reported, as of 11:00 a.m., New York City time, on the Valuation Date; or
(iii) if the yields described in (i) and (ii) above are not reported as of such time or the yields reported as of such time are not ascertainable, the yield for the applicable maturity of any actively traded U.S. Treasury security shall be based upon the average of yield quotations for such security (after excluding the highest and lowest quotations) as of 3:30 p.m., New York City time, on the Valuation Date received from no less than five primary dealers in U.S. Government securities selected by the Authority.
Each yield quotation for each actively traded U.S. Treasury security required in (i) and (iii) above shall be determined using the average of the bid and ask prices for that security.
“Valuation Date” means the third Business Day preceding the redemption date.
Optional Redemption - 2013A-2 Bonds The 2013A-2 Bonds shall be subject to optional redemption prior to maturity, at the option of the Authority, as a whole or in part at any time on and after June 1, 2022 and at the redemption price of 100% of the principal amount to be redeemed, plus interest accrued to the redemption date. The 2013A-2 Bonds may be redeemed in any order of maturity and in any principal amount within a maturity as selected by the Authority in its sole discretion. Optional Redemption - 2013B Bonds The 2013B Bonds shall be subject to optional redemption prior to maturity, at the option of the Authority, as a whole or in part at any time on and after June 1, 2022 and at the redemption price of 100% of the principal amount to be redeemed, plus interest accrued to the redemption date. The 2013B Bonds may be redeemed in any order of maturity and in any principal amount within a maturity and interest rate as selected by the Authority in its sole discretion. Sinking Fund Redemption - 2013B Bonds The 2013B Bonds maturing June 1, 2036 are subject to mandatory sinking fund redemption prior to their stated maturity date, in part, on June 1 of each of the years set forth below, in the principal amounts set forth below, together with interest accrued thereon to the date fixed for redemption, without premium. Year Amount 2034 $ 8,890,000 2035 9,335,000 2036* 9,800,000 _______________ *Final maturity.
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The 2013B Bonds maturing June 1, 2042 are subject to mandatory sinking fund redemption prior to their stated maturity date, in part, on June 1 of each of the years set forth below, in the principal amounts set forth below, together with interest accrued thereon to the date fixed for redemption, without premium. Year Amount 2037 $ 10,290,000 2038 10,805,000 2039 11,345,000 2040 11,915,000 2041 12,510,000 2042* 13,135,000 _______________ *Final maturity. The Authority may purchase at a price not to exceed par plus accrued interest any 2013B Bonds subject to mandatory sinking fund redemption and tender such 2013B Bonds to the H2O Trustee in satisfaction of the required redemptions referred to above. Selection of 2013A-1 Bonds for Redemption. Any redemption of less than all of the 2013A-1 Bonds of a particular maturity shall be allocated among registered holders of the 2013A-1 Bonds of such maturity as nearly as practicable in proportion to the principal amounts of the 2013A-1 Bonds of such maturity owned by each registered holder, subject to the authorized denominations applicable to the 2013A-1 Bonds. The particular 2013A-1 Bonds to be redeemed shall be determined by the Energy Trustee, using such method as the Energy Trustee shall deem fair and appropriate. So long as DTC or a successor securities depository is the sole registered holder of the 2013A-1 Bonds, any redemption of less than all of the 2013A-1 Bonds of a maturity will be done in accordance with the Security Depository’s procedures in effect at such time. It is the Authority's intent that redemption allocations made by DTC, the DTC participants or such other intermediaries that may exist between the Authority and the Beneficial Owners be made in accordance with these same proportional provisions. The Authority can provide no assurance that DTC, the DTC participants or any other intermediaries will allocate redemptions among Beneficial Owners on such a proportional basis. Selection of 2013A-2 Bonds for Redemption. If less than all the 2013A-2 Bonds of a particular maturity shall be called for redemption, the particular 2013A-2 Bonds of such maturity to be redeemed shall be selected by the Energy Trustee, in authorized denominations, in any manner as the Energy Trustee in its sole discretion shall deem appropriate. Selection of 2013B Bonds for Redemption. If less than all the 2013B Bonds of a particular maturity and interest rate shall be called for redemption, the particular 2013B Bonds of such maturity and interest rate to be redeemed shall be selected by the H2O Trustee, in authorized denominations, in any manner as the H2O Trustee in its sole discretion shall deem appropriate. Notice of Redemption. Notice of redemption shall be mailed by first-class mail by the Energy Trustee or the H2O Trustee, as applicable, not less than 30 nor more than 60 days prior to the date fixed for redemption, to the rating agencies then rating the applicable Series 2013 Bonds and to the respective holders of any Series 2013 Bonds designated for redemption at their addresses appearing on the bond registration books of the Energy Trustee or the H2O Trustee, as applicable. Each notice of redemption shall state the date of such notice, the date of delivery and series designation of the Series 2013 Bonds, the date fixed for redemption, the redemption price, the place or places of redemption (including the name and appropriate address or addresses of the Energy Trustee or the H2O Trustee, as applicable), the CUSIP number (if any) of the Series 2013 Bonds, to be redeemed and, in the case of Series 2013 Bonds to be redeemed in part only, the portion of the principal amount thereof to be redeemed. Each such notice also shall state that on said date there will become due and payable on each of said Series 2013 Bonds the redemption price thereof or of said specified portion of the principal amount thereof in the case of a Series 2013 Bond to be redeemed in part only, together with interest accrued thereon to the date fixed for redemption, and that from and after such date, upon the deposit of the amounts required for such redemption, interest on such Series 2013 Bond shall cease to accrue, and shall require that such Series 2013 Bonds be then surrendered at the address or addresses of the Energy Trustee or the H2O Trustee, as applicable, specified in the redemption notice. Failure by the
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Energy Trustee or the H2O Trustee, as applicable, to mail notice of redemption to the rating agencies then rating the applicable Series 2013 Bonds or to any one or more of the holders of any Series 2013 Bonds designated for redemption shall not affect the sufficiency of the proceedings for redemption with respect to the holder or holders to whom such notice was mailed. Any notice of optional redemption may be conditional upon the deposit of moneys with the Energy Trustee or the H2O Trustee, as applicable, sufficient to effect such redemption. If the required deposit is not made in a timely manner to effect the redemption, the Energy Trustee or the H2O Trustee, as applicable, shall give notice that such deposit was not made, as soon thereafter as practicable, in the same manner, to the same persons, as notice of such redemption was given. Any Series 2013 Bonds and portions of Series 2013 Bonds which have been duly selected for redemption and which are paid in accordance with the Energy Indenture or the H2O Indenture, as applicable, shall cease to bear interest on the specified redemption date.
SECURITY FOR THE SERIES 2013 BONDS Limited Obligation of the Authority The Series 2013 Bonds shall be limited obligations of the Authority and shall not constitute nor give rise to any charge against the general credit of the Authority. The Series 2013 Bonds shall not constitute a debt, liability or obligation of the Commonwealth or any political subdivision thereof and neither the full faith and credit nor the taxing power of the Commonwealth or any political subdivision thereof is pledged to the payment of the Series 2013 Bonds or the interest thereon, nor shall the Authority be obligated to pay the Series 2013 Bonds or the interest thereon except from the revenues and funds of the Authority, including the Revenues, pledged for the payment thereof under the Energy Indenture or the H2O Indenture, as applicable. The payments made by the Department of Community and Economic Development of the Commonwealth (the “Department”) under the Energy Service Agreement and the H2O Service Agreement, respectively, shall be subject to the annual appropriation of funds for such purpose by the Pennsylvania General Assembly, and there can be no assurance that such funds will be appropriated in any fiscal year of the Commonwealth. The Authority has no taxing power. Repayments of loans made by the Authority with proceeds of the Series 2013 Bonds do not constitute Revenues and are not available to pay debt service on the Series 2013 Bonds. Energy Service Agreement The Authority and the Commonwealth, acting through the Department, have entered into a Service Agreement dated as of May 1, 2009 (the “Initial Energy Service Agreement”), as previously amended and supplemented by a First Amendment to Service Agreement dated as of April 15, 2010 (the “First Amendment to Energy Service Agreement”) and as further amended and supplemented by a Second Amendment to Service Agreement dated as of January 1, 2013 (the “Second Amendment to Energy Service Agreement” and together with the Initial Energy Service Agreement and the First Amendment to Energy Service Agreement, collectively, the “Energy Service Agreement”), pursuant to which the Authority has agreed to administer the Alternative Energy Development Program established under the Alternative Energy Act and the Department has agreed to pay to the Authority a service fee (the “Energy Service Fee”) in an amount sufficient to pay the Debt Service Requirements on the 2013A-1 Bonds and the 2013A-2 Bonds and on other Bonds Outstanding under the Energy Indenture, the payments due on any other Obligations under the Energy Indenture, the amounts required to make rebate payments with respect to the 2013A-2 Bonds and any other Tax-Exempt Bonds under the Energy Indenture and certain administrative costs of the Authority subject to annual appropriation as described below. The Department has covenanted in the Energy Service Agreement to seek annual appropriations from the Pennsylvania General Assembly in amounts sufficient to pay the Energy Service Fee. See “FORM OF ENERGY SERVICE AGREEMENT” in APPENDIX D-1 hereto. The sums payable by the Department as the Energy Service Fee under the Energy Service Agreement shall be subject to the annual appropriation of funds for such purpose by the Pennsylvania General Assembly, and there can be no assurance that funds sufficient to pay the Energy Service Fee will be
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appropriated in any fiscal year of the Commonwealth. The Energy Service Agreement provides that the failure of the Department to pay the Energy Service Fee is a default, unless the failure to pay is due to the nonappropriation of funds by the Pennsylvania General Assembly, even though the annual budget submission of the Department to the Pennsylvania General Assembly included sufficient funds to make such Energy Service Fee payments in full. The Energy Indenture, however, provides that under certain circumstances a failure to pay a Bond Payment Obligation due to an event of non-appropriation is an event of default. The occurrence of an event of non-appropriation will not constitute an event of default under the Energy Indenture as long as all Bond Payment Obligations (other than with respect to Bonds held by Financing Facility Providers) are paid when due. Any acceleration of the Authority’s payment obligations with respect to the 2013A Bonds or other Obligations under the Energy Indenture will not cause an acceleration of payments by the Department under the Energy Service Agreement. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE ENERGY INDENTURE–Events of Default” in APPENDIX B-1 hereto. The obligations of the Department to make payments under the Energy Service Agreement shall survive the termination of the Energy Service Agreement and shall continue in full force and effect until all of the 2013A Bonds and other Obligations under the Energy Indenture have been defeased and/or satisfied and all payment obligations of the Authority to the holders of the 2013A Bonds and of other Obligations under the Energy Indenture have been met. The Energy Service Agreement is not a general obligation debt of the Commonwealth within the meaning of any constitutional or statutory provision relating to the incurrence of debt by the Commonwealth, and the Commonwealth has not pledged its full faith and credit or its taxing power for the payment of its obligations under the Energy Service Agreement. H2O Service Agreement The Authority and the Commonwealth, acting through the Department, have entered into a Service Agreement dated as of November 1, 2009 (the “Initial H2O Service Agreement”), as previously amended and supplemented by a First Amendment to Service Agreement dated as of September 1, 2010 (the “First Amendment to H2O Service Agreement”) and as further amended and supplemented by a Second Amendment to Service Agreement dated as of January 1, 2013 (the “Second Amendment to H2O Service Agreement” and together with the Initial H2O Service Agreement and the First Amendment to H2O Service Agreement, collectively, the “H2O Service Agreement”), pursuant to which the Authority has agreed to administer the H2O Grant Program established under the H2O PA Act and the Department has agreed to pay to the Authority a service fee (the “H2O Service Fee”) in an amount sufficient to pay the Debt Service Requirements on the 2013B Bonds and on other Bonds Outstanding under the H2O Indenture, the payments due on any other Obligations under the H2O Indenture, the amounts required to make rebate payments with respect to the 2013B Bonds (and other Tax-Exempt Bonds) under the H2O Indenture and certain administrative costs of the Authority subject to annual appropriation as described below. The Department has covenanted in the H2O Service Agreement to seek annual appropriations from the Pennsylvania General Assembly in amounts sufficient to pay the H2O Service Fee. See “FORM OF H2O SERVICE AGREEMENT” in APPENDIX D-2 hereto. The sums payable by the Department as the H2O Service Fee under the H2O Service Agreement shall be subject to the annual appropriation of funds for such purpose by the Pennsylvania General Assembly, and there can be no assurance that funds sufficient to pay the H2O Service Fee will be appropriated in any fiscal year of the Commonwealth. The H2O Service Agreement provides that the failure of the Department to pay the H2O Service Fee is a default, unless the failure to pay is due to the nonappropriation of funds by the Pennsylvania General Assembly, even though the annual budget submission of the Department to the Pennsylvania General Assembly included sufficient funds to make such H2O Service Fee payments in full. The H2O Indenture, however, provides that under certain circumstances a failure to pay a Bond Payment Obligation due to an event of non-appropriation is an event of default. The occurrence of an event of non-appropriation will not constitute an event of default under the H2O Indenture as long as all Bond Payment Obligations (other than with respect to Bonds under the H2O Indenture held by Financing Facility Providers) are paid when due. Any acceleration of the Authority’s payment obligations with respect to the 2013B Bonds or other Obligations under the H2O Indenture will not cause an acceleration of payments by the Department under the H2O
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Service Agreement. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE H2O INDENTURE–Events of Default” in APPENDIX B-2 hereto. The obligations of the Department to make payments under the H2O Service Agreement shall survive the termination of the H2O Service Agreement and shall continue in full force and effect until all of the 2013B Bonds and other Obligations under the H2O Indenture have been defeased and/or satisfied and all payment obligations of the Authority to the holders of the 2013B Bonds and of other Obligations under the H2O Indenture have been met. The H2O Service Agreement is not a general obligation debt of the Commonwealth within the meaning of any constitutional or statutory provision relating to the incurrence of debt by the Commonwealth, and the Commonwealth has not pledged its full faith and credit or its taxing power for the payment of its obligations under the H2O Service Agreement. Historical Appropriation to the Authority The Commonwealth’s fiscal year 2010 enacted budget appropriated $65.039 million in state funds to the Authority to be applied toward its debt service obligations during the fiscal year ending June 30, 2010, which amount was sufficient for the Authority to meet its debt service obligations, which includes obligations issued under the Energy Indenture, the H2O Indenture and other indentures of the Authority. In preparation for the enactment of the fiscal year 2011 Commonwealth budget, the Department and the Office of the Budget, in compliance with various service agreements, including the Energy Service Agreement and the H2O Service Agreement, requested an appropriation from the Pennsylvania General Assembly in the full amount of the Authority’s estimated debt service obligations. However, the Commonwealth’s fiscal year 2011 enacted budget appropriated only $76.480 million in state funds to the Authority, which amount was approximately $3.5 million less than required for the Authority to meet all of its debt service obligations in fiscal year 2011. In order to address this shortfall, the Authority applied approximately $3.5 million in available interest earnings to its debt service payments. The Commonwealth’s fiscal year 2012 enacted budget appropriated $82.019 million in state funds to the Authority to be applied toward its debt service obligations during the fiscal year ending June 30, 2012, which amount was sufficient for the Authority to meet its debt service obligations. The Commonwealth’s fiscal year 2013 enacted budget includes $85.519 million in state funds to support the Authority’s debt service obligations, which amount is sufficient for the Authority to meet its anticipated $82.012 million in debt service obligations. With respect to future fiscal year budgets, the Department, under the Energy Service Agreement and the H2O Service Agreement, has covenanted to request that additional appropriations sufficient for the Authority to meet its debt service obligations on Prior Energy Bonds, the Prior H2O Bonds and the Series 2013 Bonds be included in future Executive Budget requests to the Pennsylvania General Assembly. Such sums payable by the Department as the Energy Service Fee under the Energy Service Agreement and as the H2O Service Fee under the H2O Service Agreement shall be subject to the annual appropriation of funds for such purpose by the Pennsylvania General Assembly, and there can be no assurance that funds sufficient to pay either the Energy Service Fee or the H2O Service Fee will be appropriated in any fiscal year of the Commonwealth. Commonwealth Information Certain information relating to the Commonwealth is contained in APPENDIX A–“FINANCIAL AND OTHER INFORMATION RELATING TO THE COMMONWEALTH.” As referenced in APPENDIX A, copies of the Commonwealth’s Comprehensive Annual Financial Report are available at the Office of the Budget’s web site at www.budget.state.pa.us in the Budget & Financial Reports section and from the Secretary of the Budget of the Commonwealth. In addition, the Commonwealth has filed such information with the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access System. The Authority makes no representation as to the accuracy of any information contained in, or referenced in, this Official
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Statement relating to the Commonwealth. Because the general credit of the Authority is not pledged to the payment of the Series 2013 Bonds, no financial information or operating data with respect to the Authority has been included in this Official Statement. Revenue Pledge In order to secure the payment of the principal of and interest on the 2013A Bonds, the Prior Energy Bonds and Additional Bonds under the Energy Indenture and the payments due on any other Obligations under the Energy Indenture, the Energy Indenture provides for the assignment, pledge and grant by the Authority to the Energy Trustee of all Revenues, all moneys held by the Energy Trustee under the terms of the Energy Indenture (except for funds held in the Rebate Fund and any revolving fund for loan repayments held under the Energy Indenture (an "Energy Revolving Fund")) and the investment earnings thereon and all payments received by the Authority or the Energy Trustee pursuant to Financing Facilities. Revenues are defined as all amounts received from the Department by the Authority, or by the Energy Trustee on behalf of the Authority, pursuant to or with respect to the Energy Service Agreement, other than the Service Fee Component constituting Administrative Expenses under the Energy Service Agreement, and amounts required to be deposited into the Rebate Fund. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE ENERGY INDENTURE” in APPENDIX B-1 hereto. In order to secure the payment of the principal of and interest on the 2013B Bonds, the Prior H2O Bonds and Additional Bonds under the H2O Indenture and the payments due on any other Obligations under the H2O Indenture, the H2O Indenture provides for the assignment, pledge and grant by the Authority to the H2O Trustee of all Revenues, all moneys held by the H2O Trustee under the terms of the H2O Indenture (except for funds held in the Rebate Fund) and the investment earnings thereon and all payments received by the Authority or the H2O Trustee pursuant to Financing Facilities. Revenues are defined as all amounts received from the Department by the Authority, or by the H2O Trustee on behalf of the Authority, pursuant to or with respect to the H2O Service Agreement, other than the Service Fee Component constituting Administrative Expenses under the H2O Service Agreement, and amounts required to be deposited into the Rebate Fund. With respect to Bonds issued under the H2O Indenture which were issued as “BABs” (i.e., Build America Bonds that are “qualified bonds” under Section 6431 of the Code), “Revenues” includes “Subsidy Payments” (ie., certain payments received from the United States Treasury). Subsidy Payments are not pledged to secure the 2013B Bonds. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE H2O INDENTURE” in APPENDIX B-2 hereto. Defeasance The Energy Indenture provides that upon a defeasance of all Bonds Outstanding under the Energy Indenture and payment of all other sums due thereunder, and no amounts are owing with respect to any Financing Facility Payment Obligations to any Financing Facility Provider, the pledge of the Trust Estate and all other rights granted by the Energy Indenture shall be discharged and satisfied. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE ENERGY INDENTURE-THE TRUST INDENTURE–Discharge of Indenture” in APPENDIX B-1 hereto. The H2O Indenture provides that upon a defeasance of all Bonds Outstanding under the H2O Indenture and payment of all other sums due thereunder, and no amounts are owing with respect to any Financing Facility Payment Obligations to any Financing Facility Provider, the pledge of the Trust Estate and all other rights granted by the H2O Indenture shall be discharged and satisfied. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE H2O INDENTURE-THE TRUST INDENTURE–Discharge of Indenture” in APPENDIX B-2 hereto. The Budgetary Process The Commonwealth operates on a fiscal year beginning July 1 and ending June 30. The budget process commences in September, nine months prior to the beginning of the fiscal year, as departments formulate their initial budgets and hold preliminary hearings with the Office of the Budget and other members of the Governor’s staff. By November 1, formal budget requests are submitted to the Office of the Budget by all government departments and other institutions requesting appropriations. The Office of the Budget, under the direction of the
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Secretary of the Budget, reviews the requests through November and December and may hold formal hearings. The Department of Revenue, in conjunction with the Office of the Budget, prepares revenue estimates. The Constitution requires that the Governor submit annually to the General Assembly a budget consisting of three parts:
(a) a balanced operating budget for the ensuing fiscal year setting forth proposed expenditures and estimated revenues from all sources and, if estimated revenues and available surplus are less than proposed expenditures, recommending specific additional sources of revenue sufficient to pay the deficiency; (b) a capital budget for the ensuing fiscal year setting forth in detail proposed expenditures to be financed from the proceeds of obligations of the Commonwealth or of its agencies or authorities or from operating funds; and (c) a financial plan for not less than the succeeding five fiscal years, which includes for each year (i) projected operating expenditures classified by department or agency and by program, and estimated revenues by major categories from existing and additional sources, and (ii) projected expenditures for capital projects specifically itemized by purpose and their proposed sources of financing.
All funds received by the Commonwealth are subject by statute to appropriation in specific amounts by the Pennsylvania General Assembly or by executive authorizations by the Governor. The Governor’s budget encompasses both annual appropriations and executive authorizations. The Governor is required to submit the proposed budget as soon as possible after the organization of the Pennsylvania General Assembly but not later than the first full week in February except in his first year of office. The Governor's submission begins with the Budget Message delivered in joint session. The budget in the form of a proposed bill is delivered to the appropriations committee of one of the houses. Hearings are held on the bills constituting the budget. The operating budget is considered in the form of the General Appropriations Bill and its supplements. The Bill is limited to appropriations for debt service, public schools and the executive, legislative and judicial branches. Its supplements cover appropriations from special revenue funds not included in the General Appropriations Bill and for such subjects as capital projects funded from current revenues. The operating budget also includes single subject bills covering appropriations made to any charitable or educational institutions not under the absolute control of the Commonwealth other than certain State-owned schools (“non-preferred appropriations”). The Constitution mandates that total operating budget appropriations made by the General Assembly may not exceed the sum of (a) the actual and estimated revenues in a given year, and (b) the surplus of the preceding year. The Pennsylvania General Assembly may change, eliminate or add amounts and items to the proposed budget submitted by the Governor and there can be no assurance that the budget, as proposed by the Governor, will be enacted into law by June 30. Once the bills constituting the budget have passed both houses and are returned to the Governor, he may either veto bills or item veto appropriations within bills. A gubernatorial veto can be overridden only by a two-thirds majority of all members of each house. In the event that the General Assembly fails to pass or the Governor fails to sign an appropriation act prior to July 1 of any fiscal year for that fiscal year, the Pennsylvania Constitution, the laws of the Commonwealth and certain state and federal court decisions provide that the Commonwealth may continue during such periods of an un-budgeted fiscal year to make debt service payments, payments for mandated federal programs such as cash assistance and payments related to the health and safety of the citizens of the Commonwealth such as police and correctional services. For additional information see “COMMONWEALTH GOVERNMENT AND FISCAL ADMINISTRATION - The Budgetary Process” in APPENDIX A hereto.
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Additional Bonds and Financing Facility Obligations The Authority may issue Additional Bonds under the Energy Indenture to provide funds to accomplish its purposes under the Act and the Alternative Energy Act, including refunding indebtedness of the Authority, subject to the limitations in the Act and the Alternative Energy Act. No such Additional Bonds shall have a security interest in the Trust Estate created under the Energy Indenture prior to the security interest of the 2013A and the Prior Energy Bonds in such monies, however, Additional Bonds may be secured on a parity with the 2013A Bonds and the Prior Energy Bonds. The Authority may issue Additional Bonds under the H2O Indenture to provide funds to accomplish its purposes under the Act and the H2O PA Act, including refunding indebtedness of the Authority, subject to the limitations in the Act and the H2O PA Act. No such Additional Bonds shall have a security interest in the Trust Estate created under the H2O Indenture prior to the security interest of the 2013B Bonds and the Prior H2O Bonds in such monies, however, Additional Bonds may be secured on a parity with the 2013B Bonds and the Prior H2O Bonds. In connection with the issuance of Additional Bonds under either the Energy Indenture or the H2O Indenture, the Authority may enter into credit agreements, liquidity agreements, reimbursement agreements, interest rate swap agreements or similar agreements. Unless otherwise provided in such agreements, the obligations of the Authority under such agreements shall rank on a parity with its respective obligations under the Energy Indenture and the H2O Indenture. See “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE ENERGY INDENTURE-THE TRUST INDENTURE–Trust Estate” and “–Financing Facilities” in APPENDIX B-1 hereto and “DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE H2O INDENTURE-THE TRUST INDENTURE–Trust Estate” and “–Financing Facilities” in APPENDIX B-2 hereto.
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DEBT SERVICE REQUIREMENTS Energy Bonds The following table sets forth the annual debt service requirements on the 2013A Bonds and the outstanding Prior Energy Bonds for each fiscal year ending June 30. This table does not reflect any indebtedness of the Authority under other indentures.
Fiscal Year Ending June 30
Debt Service on Prior Energy Bonds
2013A Bonds Total Debt Service Principal Interest Debt Service
2013 $18,597,955 $18,597,955 2014 18,599,905 $3,490,000 $5,671,844 $9,161,844 27,761,749 2015 18,594,611 4,995,000 4,165,126 9,160,126 27,754,738 2016 18,603,691 5,030,000 4,127,914 9,157,914 27,761,605 2017 18,596,774 5,090,000 4,069,616 9,159,616 27,756,390 2018 18,600,527 5,165,000 3,993,673 9,158,673 27,759,201 2019 18,599,805 5,260,000 3,901,116 9,161,116 27,760,922 2020 18,596,673 5,370,000 3,789,184 9,159,184 27,755,857 2021 18,595,707 5,500,000 3,658,800 9,158,800 27,754,507 2022 18,598,607 5,650,000 3,511,675 9,161,675 27,760,282 2023 18,597,043 5,810,000 3,349,238 9,159,238 27,756,281 2024 18,600,222 5,990,000 3,170,580 9,160,580 27,760,802 2025 18,596,420 6,185,000 2,977,403 9,162,403 27,758,823 2026 18,598,733 6,390,000 2,771,751 9,161,751 27,760,484 2027 18,601,783 6,375,000 2,552,894 8,927,894 27,529,676 2028 18,600,145 6,865,000 2,335,000 9,200,000 27,800,145 2029 18,596,750 7,210,000 1,991,750 9,201,750 27,798,500 2030 18,600,500 7,570,000 1,631,250 9,201,250 27,801,750 2031 18,600,000 7,950,000 1,252,750 9,202,750 27,802,750 2032 10,678,500 8,345,000 855,250 9,200,250 19,878,750 2033 0 8,760,000 438,000 9,198,000 9,198,000
Totals1 $364,054,352 $123,000,000 $60,214,813 $183,214,813 $547,269,165 ___________________ 1 Totals may not add due to rounding.
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H2O Bonds The following table sets forth the annual debt service requirements on the 2013B Bonds and the outstanding Prior H2O Bonds for each fiscal year ending June 30. This table does not reflect any indebtedness of the Authority under other indentures.
Fiscal Year Ending June 30
Total Debt Service on
Prior H2O Bonds
Debt Service
Net of Subsidy2
2013B Bonds
Total Debt Service3 Principal Interest Debt Service
2013 $43,019,725 $32,923,271 $43,019,725 2014 42,909,462 32,922,177 $ 90,000 $13,702,506 $13,792,506 56,701,969 2015 42,786,764 32,922,556 3,685,000 10,105,706 13,790,706 56,577,470 2016 42,644,644 32,921,615 3,835,000 9,958,306 13,793,306 56,437,950 2017 42,484,121 32,918,215 3,990,000 9,804,906 13,794,906 56,279,027 2018 42,311,515 32,918,861 4,145,000 9,645,306 13,790,306 56,101,821 2019 42,122,436 32,915,923 4,355,000 9,438,056 13,793,056 55,915,493 2020 41,930,536 32,919,218 4,570,000 9,220,306 13,790,306 55,720,842 2021 41,702,954 32,913,827 4,790,000 9,000,806 13,790,806 55,493,760 2022 41,472,945 32,914,121 5,030,000 8,761,306 13,791,306 55,264,251 2023 41,233,910 32,913,799 5,280,000 8,509,806 13,789,806 55,023,717 2024 40,989,470 32,916,875 5,545,000 8,245,806 13,790,806 54,780,276 2025 40,728,026 32,912,049 5,790,000 8,004,181 13,794,181 54,522,207 2026 40,435,353 32,911,980 6,080,000 7,714,681 13,794,681 54,230,035 2027 40,028,930 32,906,805 6,380,000 7,410,681 13,790,681 53,819,612 2028 39,612,598 32,907,439 6,675,000 7,115,281 13,790,281 53,402,879 2029 39,174,275 32,902,529 7,010,000 6,781,531 13,791,531 52,965,807 2030 38,722,408 32,901,065 7,360,000 6,431,031 13,791,031 52,513,439 2031 38,254,882 32,901,673 7,730,000 6,063,031 13,793,031 52,047,913 2032 37,757,744 32,895,284 8,115,000 5,676,531 13,791,531 51,549,275 2033 37,250,282 32,897,933 8,520,000 5,270,781 13,790,781 51,041,063 2034 36,719,761 32,897,845 8,890,000 4,901,250 13,791,250 50,511,011 2035 36,164,028 32,893,618 9,335,000 4,456,750 13,791,750 49,955,778 2036 35,585,927 32,888,852 9,800,000 3,990,000 13,790,000 49,375,927 2037 34,993,036 32,891,973 10,290,000 3,500,000 13,790,000 48,783,036 2038 34,367,288 32,885,987 10,805,000 2,985,500 13,790,500 48,157,788 2039 33,721,530 32,884,495 11,345,000 2,445,250 13,790,250 47,511,780 2040 8,732,717 8,565,516 11,915,000 1,878,000 13,793,000 22,525,717 2041 0 0 12,510,000 1,282,250 13,792,250 13,792,250 2042 0 0 13,135,000 656,750 13,791,750 13,791,750
Totals1 $1,077,857,266 $897,065,500 $207,000,000 $192,956,300 $399,956,300 $1,477,813,567 _____________ 1 Totals may not add due to rounding. 2 The Authority’s Revenue Bonds, Series D of 2009 (Federally Taxable – Build America Bonds) and Revenue Bonds, Series C-2 of 2010 (Federally Taxable – Build America Bonds) were issued as Build America Bonds under Section 54AA of the Internal Revenue Code of 1986, as amended (collectively, the “Build America Bonds”). Debt service shown is net of the refundable credit expected to be received from the United States Treasury equal to 35% of each interest payment on the Build America Bonds.
3 Total debt service does not include the refundable credit expected to be received from the United States Treasury equal to 35% of each interest payment on the Build America Bonds.
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TAX MATTERS Federal Tax Exemption - 2013A-1 Bonds Interest on the 2013A-1 Bonds is includable in gross income for federal income tax purposes. Federal Tax Exemption – 2013A-2 Bonds and 2013B Bonds The Internal Revenue Code of 1986, as amended (the “Code”) contains provisions relating to the tax-exempt status of interest on obligations issued by governmental entities which apply to the 2013A-2 Bonds and the 2013B Bonds. These provisions include, but are not limited to, requirements relating to the use and investment of the proceeds of the 2013A-2 Bonds and the 2013B Bonds and the rebate of certain investment earnings derived from such proceeds to the United States Treasury Department on a periodic basis. These and other requirements of the Code must be met by the Authority, the Ben Franklin Authority and the PA DEP, subsequent to the issuance and delivery of the 2013A-2 Bonds and the 2013B Bonds in order for interest thereon to be and remain excludable from gross income for purposes of federal income taxation. The Authority, the Ben Franklin Authority and the PA DEP have covenanted to comply with such requirements. In the opinion of Bond Counsel, interest on the 2013A-2 Bonds and the 2013B Bonds will be excluded from gross income for purposes of federal income taxation under existing statutes, regulations, rulings and court decisions. The opinion of Bond Counsel is subject to the condition that the Authority, the Ben Franklin Authority and the PA DEP comply with all applicable federal income tax law requirements related to the 2013A-2 Bonds and the 2013B Bonds that must be satisfied subsequent to the issuance of the 2013A-2 Bonds and the 2013B Bonds in order that interest thereon continues to be excluded from gross income. The Authority, the Ben Franklin Authority and the PA DEP have covenanted to comply with all such requirements. Failure to comply with certain of such requirements could cause the interest on the 2013A-2 Bonds and the 2013B Bonds to be includable in gross income retroactive to the date of issuance of the 2013A-2 Bonds and the 2013B Bonds, respectively. Interest on the 2013A-2 Bonds and the 2013B Bonds is not treated as an item of tax preference under Section 57 of the Code for purposes of the individual and corporate alternative minimum taxes; however, under the Code, to the extent that interest on the 2013A-2 Bonds and the 2013B Bonds is a component of a corporate holder’s “adjusted current earnings,” a portion of that interest may be subject to the corporate alternative minimum tax. Original Issue Discount The 2013B Bonds maturing on June 1, 2033 (3.375% coupon) (the “Discount Bonds”), have been sold with original issue discount which is excluded from gross income for Federal income tax purposes to the same extent as interest on the Discount Bonds. For each maturity of Discount Bonds, original issue discount is the excess of the stated redemption price at maturity over the initial offering price. Such original issue discount accrues actuarially on a constant interest rate basis over the term of each Discount Bond, and the tax basis of each Discount Bond acquired at such initial offering price by an initial purchaser thereof will be increased by the amount of such accrued original issue discount. Purchasers of any Discount Bonds, whether at the time of the initial issuance or subsequent thereto, should consult their own tax advisors with respect to the determination and tax treatment of original issue discount. Original Issue Premium The 2013A-2 Bonds (other than the 2013A-2 Bonds maturing on June 1, 2027) and the 2013B Bonds (other than the 2013B Bonds maturing on June 1, 2027 (3.000% coupon) and June 1, 2033 (3.375% coupon)) (together, the “Premium Bonds”) have been sold with original issue premium. An amount equal to the excess of the initial public offering price of a Premium Bond over its stated redemption price at maturity constitutes premium on such Premium Bond. A purchaser of a Premium Bond must amortize any premium over such Premium Bond’s term using constant yield principles. The amount of amortized bond premium (i) reduces the holder’s basis in the Premium Bond for purposes of determining gain or loss for federal income tax purposes upon the sale or other disposition of the Premium Bond and (ii) is not allowed as a deduction for federal income tax purposes to the holder. Purchasers of any Premium Bonds, whether at the time of the initial issuance or subsequent thereto, should consult their own tax advisors with respect to the determination and treatment of premium.
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In addition to the matters addressed above, prospective purchasers of the 2013A-2 Bonds and the 2013B Bonds should be aware that ownership of the 2013A-2 Bonds and the 2013B Bonds may result in collateral tax consequences to certain taxpayers, including, but not limited to foreign corporations, certain S corporations, recipients of social security and railroad retirement benefits, financial institutions and property or casualty insurance companies. Bond Counsel expresses no opinion regarding any other federal tax consequences relating to the 2013A-2 Bonds and the 2013B Bonds or the receipt of interest thereon. No assurance can be given that amendments to the Code or other federal legislation will not be introduced and/or enacted which would cause the interest on the 2013A-2 Bonds and the 2013B Bonds to be subject, directly or indirectly, to federal income taxation or adversely affect the market price of the 2013A-2 Bonds and the 2013B Bonds or otherwise prevent the holders of the 2013A-2 Bonds and the 2013B Bonds from realizing the full current benefit of the tax status of the interest thereon. State Tax Exemption - Series 2013 Bonds In the opinion of Bond Counsel, under the existing laws of the Commonwealth, the interest on the Series 2013 Bonds is free from Pennsylvania personal income taxation and Pennsylvania corporate net income taxation, but such exemption does not extend to gift, estate, succession or inheritance taxes or any other taxes not levied or assessed directly on the Series 2013 Bonds or the interest thereon. Profits, gains or income derived from the sale, exchange or other disposition of the Series 2013 Bonds are subject to state and local taxation within the Commonwealth. This summary is based on laws, regulations, rulings and decisions now in effect, all of which may change. Any change could apply retroactively and could affect the continued validity of this summary. Prospective purchasers should consult their tax advisors about the consequences of purchasing or holding the Series 2013 Bonds.
LITIGATION There is no litigation pending or, to the knowledge of the Authority, threatened, against the Authority, in any court to restrain or enjoin the issuance, sale or delivery of the Series 2013 Bonds, or the collection of revenues or funds pledged or to be pledged to pay the principal of and interest on the Series 2013 Bonds, or in any way questioning the proceedings and authority under which the Series 2013 Bonds are to be issued, or the validity of the Series 2013 Bonds, the right of the Authority to issue the Series 2013 Bonds for the purposes described in this Official Statement, or the exemption from federal income taxation of interest on the 2013A-2 Bonds or the 2013B Bonds. Nor is there any litigation pending, or to the knowledge of the Authority, threatened against the Authority or affecting any of the property of the Authority, which if determined adversely, would have a material adverse impact on the transactions contemplated hereby or the security for the Series 2013 Bonds.
UNDERWRITING The Series 2013 Bonds are being purchased by RBC Capital Markets, LLC, Citigroup Global Markets Inc. and PNC Capital Markets LLC (collectively, the “Underwriters”). The Underwriters have agreed to purchase (1) the 2013A-1 Bonds from the Authority at a purchase price of $74,658,782.46 (representing the aggregate principal amount of the 2013A-1 Bonds, less an underwriters’ discount of $341,217.54), (2) the 2013A-2 Bonds from the Authority at a purchase price of $55,641,178.18 (representing the aggregate principal amount of the 2013A-2 Bonds, plus an original issue premium in the amount of $7,900,243.00 and less an underwriters’ discount of $259,064.82), and (3) the 2013B Bonds from the Authority at a purchase price of $238,574,476.60 (representing the aggregate principal amount of the 2013B Bonds, plus net original issue premium in the amount of $32,476,034.90 and less an underwriters’ discount of $901,558.30). The Underwriters will purchase the Series 2013 Bonds pursuant to a bond purchase agreement for the Series 2013 Bonds entered into by and between the Underwriters and the Authority. The obligation of the Underwriters to accept delivery of the Series 2013 Bonds is subject to various conditions contained in said bond purchase agreement. The Underwriters will be obligated to purchase all the Series 2013 Bonds if any
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Series 2013 Bonds are purchased. The Series 2013 Bonds may be offered and sold to certain dealers (including dealers depositing such Series 2013 Bonds into investment trusts) at prices lower than the public offering price set forth on the cover page of this Official Statement and such public offering price may be changed, from time to time, by the Underwriters. Citigroup Global Markets Inc. and its parent company, Citigroup, Inc., have entered into a distribution agreement dated May 31, 2009, as amended, with Morgan Stanley Smith Barney LLC ("MSSB") and its parent company, Morgan Stanley Smith Barney Holdings LLC, whereby Citigroup Global Markets Inc. will distribute municipal securities to retail investors through the financial advisor network of MSSB. This distribution arrangement became effective on June 1, 2009. As part of this arrangement, Citigroup Global Markets Inc. will compensate MSSB for its selling efforts with respect to the Series 2013 Bonds.
RATINGS Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) and Fitch Ratings (“Fitch”) have assigned the Series 2013 Bonds ratings of “A1”, “AA-” and “AA”, respectively. Such ratings reflect only the views of such organizations and any desired explanation of the significance of such ratings or any outlook associated with such ratings should be obtained from the rating agency furnishing the same, at the following addresses: Moody’s Investors Service, Inc., 99 Church Street, New York, New York 10007; Standard & Poor’s Ratings Services, 25 Broadway, New York, New York 10004; Fitch Ratings, One State Street Plaza, New York, New York 10004. Generally, a rating agency bases its rating on the information and materials furnished to it and on investigations, studies and assumptions of its own. There is no assurance that any such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely by the rating agency concerned, if in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Series 2013 Bonds.
LEGAL MATTERS Certain legal matters incident to the authorization, issuance, sale and delivery of the Series 2013 Bonds are subject to the approval of Cozen O’Connor, Philadelphia, Pennsylvania, Bond Counsel. The approving opinions of Bond Counsel will be in substantially the forms attached to this Official Statement as APPENDICES E-1 and E-2. Certain legal matters concerning the Authority will be passed on for the Authority by Buchanan Ingersoll & Rooney PC, Harrisburg, Pennsylvania, and for the Underwriters, by their counsel, Eckert Seamans Cherin & Mellott, LLC, Harrisburg, Pennsylvania. Certain legal matters with respect to the obligations of the Commonwealth under the Energy Service Agreement and the H2O Service Agreement will be passed upon by the Office of Chief Counsel of the Department.
FINANCIAL ADVISOR
The Authority has retained Public Financial Management, Inc. of Philadelphia, Pennsylvania, as Financial Advisor in connection with the issuance of the Series 2013 Bonds. Public Financial Management, Inc. is not obligated to undertake, and has not undertaken to make, an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information contained in this Official Statement. Public Financial Management, Inc. is an independent advisory firm and is not engaged in the business of underwriting, trading, or distributing municipal securities or other public securities.
CERTAIN RELATIONSHIPS From time to time, in the normal course of business, PNC Capital Markets LLC, PNC Bank, National Association and/or affiliates of either of the same, may have a credit, investment banking or other financial relationship with the Authority and various departments of the Commonwealth, including the Department, among
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others. PNC Capital Markets LLC and PNC Bank, National Association are each wholly-owned subsidiaries of The PNC Financial Services Group, Inc.
LIMITATIONS OF RIGHTS AND REMEDIES UNDER FEDERAL BANKRUPTCY CODE The right and remedies of holders of the Series 2013 Bonds may be subject to the provisions of the United States Bankruptcy Code (the “Bankruptcy Code”), which permits, under prescribed circumstances, a public agency or instrumentality of a state, if specifically authorized under state law to be a debtor under Chapter 9 of the Bankruptcy Code, to file a petition for relief, in the nature of an adjustment in the repayment of debts, in a bankruptcy court of the United States, to other reorganization and insolvency proceedings, and to general principles of equity, whether asserted in a proceeding at law or in equity.
UNDERTAKING TO PROVIDE CONTINUING DISCLOSURE The Authority and the Commonwealth will enter into a Continuing Disclosure Agreement (the “Disclosure Agreement”) for the benefit of the holders of the Series 2013 Bonds pursuant to which they will agree to send certain financial information and operating data to the MSRB via the Electronic Municipal Market Access System (“EMMA”) annually and to provide notice to the MSRB via EMMA of certain events, pursuant to the requirements of Section (b)(5)(i) of Securities and Exchange Commission Rule 15c2-12 (17 C.F.R. § 240.15c2- 12) (the “Rule”). The proposed form of the Continuing Disclosure Agreement is attached hereto as APPENDIX F. A failure by the Authority or the Commonwealth to comply with the Disclosure Agreement will not constitute a default or Event of Default under the Energy Indenture or the H2O Indenture, and the holders of the Series 2013 Bonds will have only the remedies set forth in the Disclosure Agreement itself. Nevertheless, a failure must be reported in accordance with the Rule and may be expected to be considered by any broker, dealer or municipal securities dealer before recommending the purchase or sale of the Series 2013 Bonds in the secondary market. Consequently, such a failure may adversely affect the transferability and liquidity of the Series 2013 Bonds and their market price. Neither the Authority nor the Commonwealth has previously failed to comply with their respective obligations under the Rule.
MISCELLANEOUS The references herein to the Act, the Alternative Energy Act, the H2O PA Act, Act 50, the Energy Indenture, the H2O Indenture, the Energy Service Agreement, the H2O Service Agreement and the Disclosure Agreement are brief summaries of certain provisions thereof. Such summaries do not purport to be complete and reference is made to such statutes and documents for full and complete statements thereof. The agreements of the Authority with the holders of the Series 2013 Bonds are fully set forth in the Energy Indenture and the H2O Indenture, as applicable, and neither any advertisement of the Series 2013 Bonds nor this Official Statement is to be construed as constituting an agreement with the purchasers of the Series 2013 Bonds. So far as any statements are made in this Official Statement involving matters of opinion, whether or not expressly so stated, they are intended merely as such and not as representations of fact. Copies of the documents mentioned in this paragraph are on file at the offices of the Energy Trustee or the H2O Trustee, as applicable. The execution and delivery of this Official Statement by its Executive Director have been duly authorized by the Authority.
COMMONWEALTH FINANCING AUTHORITY By: /s/ Scott Dunkelberger Scott Dunkelberger Executive Director
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APPENDIX A
FINANCIAL AND OTHER INFORMATION RELATING TO THE COMMONWEALTH
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COMMONWEALTH GOVERNMENT
The Commonwealth is organized into three separate branches of government — executive, legislative and judicial — as defined in the Pennsylvania Constitution. Five officials of the Commonwealth’s executive branch are elected in statewide elections for four-year terms expiring on the dates shown below.
Name Office Term Expires Tom Corbett Governor January 20, 2015
James Cawley Lieutenant Governor January 20, 2015
Linda L. Kelly Attorney General January 15, 2013
Robert M. McCord State Treasurer January 15, 2013 Jack Wagner Auditor General January 15, 2013 Commonwealth Employees
Employees are permitted to organize and bargain collectively. As of July 2011, 82 percent of the full-time salaried employees under the Governor’s jurisdiction were covered by collective bargaining agreements or memoranda of understanding. Approximately 43 percent of state employees are represented by the American Federation of State, County and Municipal Employees (“AFSCME”). Approximately 58 percent of state employees, represented by the AFSCME, Pennsylvania Social Services Union and other unions, are covered by contracts that took effect July 1, 2011 and expire on June 30, 2015. These contracts provide for a pay freeze in the first year of the contract and general pay increases totaling four percent over the balance of their term. Interest arbitration awards dictate the salary increase to be provided to employees covered by five other unions. One of those awards provided for a three year contract commencing on July 1, 2011 which similarly provides for general pay increases totaling four percent over the term of contract. Two other interest arbitration units have contracts that expired on June 30, 2011 and both remain in negotiations; while the remaining two units have contracts that expired on June 30, 2012. Table 4, on the next page, presents the number of approved and filled positions under the Governor’s jurisdiction on July 1st of the years 2007 through 2011.
Table 4* Filled Salaried Positions and Employees
Under the Governor’s Jurisdiction(a)
2007-2011
As of July 1
Total Full and Part Time
Filled Salaried Positions
Total Full Time Salaried
Employees
Civil Service Salaried Positions
Civil Service As a % of Total Filled Salaried
Positions
2007 ............................................ 77,013 76,716 52,918 68.7 2008 ............................................ 77,531 77,259 53,141 68.5 2009 ............................................ 77,248 76,979 52,905 68.5 2010 ............................................ 76,110 75,878 52,512 69.0 2011 ............................................ 74,086 73,874 50,991 68.8
(a)
Excludes employees of the legislative and judicial branches, the Department of the Auditor General, the Treasury Department, the State System of Higher Education and independent agencies, boards and commissions. Source: Office of Administration, 2012 State Government Workforce Statistics .
* Tables 1, 2 and 3 intentionally omitted
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COMMONWEALTH GOVERNMENT AND FISCAL ADMINISTRATION
The government of the Commonwealth is composed of three separate branches. A general organization chart of the Commonwealth’s government is shown on the following page.
Legislative Branch
The legislative branch consists of the General Assembly and its staff. The General Assembly is bicameral, composed of the Senate and the House of Representatives. The 50 members of the Senate serve staggered four-year terms and the 203 Representatives serve identical two-year terms. The General Assembly meets in regular session biannually beginning on the first Tuesday of January following elections. Special sessions may be called by the Governor on petition of a majority of the members of each house or whenever the Governor determines that public interest so requires. Legislative leadership includes majority and minority leaders in each house, a President Pro Tempore of the Senate and a Speaker of the House of Representatives.
Executive Branch
The Executive Branch is headed by five elected officials and encompasses 19 departments and approximately 36 independent commissions, boards, authorities and agencies.
The five elected officials are the Governor, the Lieutenant Governor, the Attorney General, the State Treasurer and the Auditor General. The Governor and the Lieutenant Governor are elected on the same ballot and serve a four-year term. The Governor is eligible to succeed himself for one term. The Auditor General, the Attorney General and the State Treasurer are elected for four-year terms in an even-year election held between gubernatorial elections.
The Governor is the chief executive officer of the Commonwealth. All departments except those of the State Treasurer, the Attorney General and the Auditor General are under the direct jurisdiction of the Governor. The head of each of the remaining departments is a Secretary who is appointed by the Governor and confirmed by a majority vote of the Senate. Each Secretary serves at the Governor’s pleasure and is a member of the Governor’s Cabinet.
The Lieutenant Governor presides over the Senate and serves as Acting Governor during the disability of the Governor and becomes Governor in the case of the death, conviction or impeachment, failure to qualify or resignation of the Governor.
The Attorney General is the chief law enforcement officer of the Commonwealth and is responsible for upholding and defending the constitutionality of all statutes. He is also responsible for reviewing the form and legality of all proposed rules and regulations, deeds, leases and contracts to be executed by Commonwealth agencies. The Office of Attorney General is under the Attorney General’s direct jurisdiction.
The State Treasurer is charged with receiving, depositing and investing all Commonwealth funds and is responsible for the pre-audit approval of all requisitions for the disbursements of monies in the State Treasury. The Treasury Department is under the State Treasurer’s direct jurisdiction.
The Auditor General is charged with making audits of completed financial transactions. The Department of the Auditor General is under the Auditor General’s direct jurisdiction.
Activities of state government are also conducted by various independent commissions, boards, authorities and agencies created by statute and not under the direct jurisdiction of the executive and legislative branches.
Judicial Branch
The judicial power of the Commonwealth is vested in a unified judicial system consisting of a Supreme Court and various other courts of original and appellate jurisdiction which are under the supervision and authority of the Supreme Court. All justices, judges and district justices are elected to office.
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Fiscal Organization
Each branch of the Commonwealth’s government is responsible for its respective fiscal operations subject to restrictions embodied in the Constitution, the Administrative Code, and the Fiscal Code. Such restrictions are enforced and other central administrative functions are provided by five departments: the Office of the Budget (“OB”), the Office of Administration (“OA”), the Treasury Department, the Department of Revenue and the Department of the Auditor General. OB and OA are administrative offices within the Governor’s offices. The Secretary of the Budget and the Secretary of Administration are appointed by the Governor and are responsible for the operations of their respective offices. The Department of Revenue is led by the Secretary of Revenue, who is appointed by the Governor subject to the advice of the Senate. The Treasury Department and the Department of the Auditor General are headed by the respective elected officials.
OB monitors the operation of the Commonwealth’s departments, operates a central accounting system, compiles and publishes the Commonwealth’s financial reports, assists in the preparation and publication of the budget, coordinates capital improvements and is responsible for the issuance of the Commonwealth’s debt. OA is responsible for personnel policy and programs, management policy and organizational structure, data processing service, and electronic data processing policy and planning. The Treasury Department receives, invests and disburses all funds and maintains central cash records. The Department of Revenue administers the collection of most taxes. The Department of the Auditor General oversees the examination of the majority of financial transactions.
Commissions, authorities and agencies that are both independent by statute and financially self-supporting, operate autonomously although their capital projects and financing are reviewed by OB and included in the capital budget.
The Budgetary Process
The Commonwealth operates on a fiscal year beginning July 1 and ending June 30. For example, “fiscal year 2012” refers to the fiscal year ending on June 30, 2012.
The budget process commences in September, nine months prior to the beginning of the fiscal year, as departments formulate their initial budgets in response to Program Policy Guidelines issued by the Governor and hold preliminary hearings with OB and other members of the Governor’s staff. By November 1, formal budget requests are submitted to OB by all government departments and other institutions requesting appropriations. OB, under the direction of the Secretary of Budget, reviews the requests through November and December and may hold formal hearings.
The Department of Revenue, in conjunction with OB, prepares revenue estimates. In the preparation of such estimates, internal analysis, information from selected departments and econometric analysis are utilized. The Commonwealth subscribes to economic forecasts prepared by the economic forecasting company Global Insight for national and Pennsylvania economic data that are used to estimate economically sensitive Commonwealth revenues. Other econometric forecasts are also consulted.
The Constitution requires that the Governor submit annually to the General Assembly a budget consisting of three parts:
(a) a balanced operating budget for the ensuing fiscal year setting forth proposed expenditures and estimated revenues from all sources and, if estimated revenues and available surplus are less than proposed expenditures, recommending specific additional sources of revenue sufficient to pay the deficiency;
(b) a capital budget for the ensuing fiscal year setting forth in detail proposed expenditures to be financed from the proceeds of obligations of the Commonwealth or of its agencies or authorities or from operating funds; and
(c) a financial plan for not less than the succeeding five fiscal years, which includes for each year (i) projected operating expenditures classified by department or agency and by program, and estimated revenues by major categories from existing and additional sources, and (ii) projected
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expenditures for capital projects specifically itemized by purpose and their proposed sources of financing.
All funds received by the Commonwealth are subject by statute to appropriation in specific amounts by the General Assembly or by executive authorizations by the Governor. The Governor’s budget encompasses both annual appropriations and executive authorizations.
The Governor is required to submit the proposed budget as soon as possible after the organization of the General Assembly but not later than the first full week in February except in his first year of office. The Governor’s submission begins with the Budget Message delivered in joint session. The budget in the form of a proposed bill is delivered to the appropriations committee of one of the houses. Hearings are held on the bills constituting the budget. In an iterative process, bills are reported from committee to floor and considered in and between houses.
The operating budget is considered in the form of the General Appropriations Bill and its supplements. The Bill is limited to appropriations for debt service, public schools and the executive, legislative and judicial branches. Its supplements cover appropriations from special revenue funds not included in the General Appropriations Bill and for such subjects as capital projects funded from current revenues. The operating budget also includes single subject bills covering appropriations made to any charitable or educational institutions not under the absolute control of the Commonwealth other than certain State-owned schools (“non-preferred appropriations”).
The Constitution mandates that total operating budget appropriations made by the General Assembly may not exceed the sum of (a) the actual and estimated revenues in a given year, and (b) the surplus of the preceding year. The Constitution further specifies that a surplus of operating funds at the end of the fiscal year shall be appropriated. That is, if funds remain from the end of a fiscal year they must be appropriated for the ensuing year. Also, if a deficit occurs at year-end, funds must be provided for such a deficit.
Pursuant to the Administrative Code, the executive branch establishes the revenue estimates used in the budget. In practice, the revenue estimates used to balance the operating budget consist of the appropriate fund’s available surplus and its estimated cash receipts for the fiscal year as well as net accruals. Appropriation lapses estimated to occur during the year or at year-end are not included; lapses are not available for re-appropriation until they occur.
Under this budgetary process a deficit can occur if revenues are less than those estimated in the budget and the shortfall is not offset by any unappropriated surplus or by appropriation lapses during or at the end of the year or by legislative action to increase revenues or reduce appropriation.
The Administrative Code was amended in 1978 to provide for stronger executive control of expenditures. All departments under the Governor’s jurisdiction may be required to submit estimates of expenditures during the ensuing month, quarter or any other such period as requested by the Governor. These estimates are subject to the approval of the Secretary of Budget. The Governor is empowered to request the State Treasurer to withhold funds from any such department not spending within such estimates. The Secretary of Budget is empowered to set personnel levels for departments. Departments are required to provide personnel data monthly so that the Commonwealth’s computerized data file on personnel levels can be maintained and used to monitor the Commonwealth’s largest operating expense.
The proposed capital budget is considered in the form of the Capital Budget Bill and its supplements. The capital budget determines limits for the amount of debt that can be issued in that fiscal year for categories of capital projects, itemizes for funding all capital projects not previously itemized, authorizes the issuance of debt to finance these projects and appropriates the proceeds from the issuance of debt.
All appropriations require the majority vote of all members in each house except for non-preferred appropriations and appropriations from the Budget Stabilization Reserve Fund and from the Health Endowment Account portion of the Tobacco Settlement Fund which require passage by a two-thirds vote. During the legislative process, the General Assembly may add, change or delete any items in the budget proposed by the Governor. Once the bills constituting the budget have passed both houses and are returned to the Governor, he may either veto bills or item veto appropriations within bills. A gubernatorial veto can be overridden only by a two-thirds majority of all members of each house.
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In the event that the General Assembly fails to pass or the Governor fails to sign an appropriations act prior to July 1 of any fiscal year for that fiscal year, the Pennsylvania Constitution, the laws of Pennsylvania and certain state and federal court decisions provide that the Commonwealth may continue during such un-budgeted fiscal year to make debt service payments, payments for mandated federal programs such as cash assistance and payments related to the health and safety of the citizens of the Commonwealth such as police and correctional services.
Accounting and Budgetary Controls
Every department of the executive branch that receives appropriations from the Commonwealth, with the exception of the Treasury Department and the Departments of the Auditor General and the Attorney General, has a comptroller appointed by and under the direct jurisdiction of the Governor. These agencies share a centralized encumbrance-based accounting system supervised by OB. Executive departments operating separate additional accounting systems include the Department of Transportation for the Motor License Fund, the Liquor Control Board for the State Stores Fund and the Department of Labor and Industry for the payment of unemployment compensation benefits. Officials within the Treasury Department, the Departments of the Auditor General and the Attorney General and the judicial and legislative branches administer individual operations under the jurisdiction of their respective areas.
Expenditure control occurs at two levels. The first is by appropriations and is enforced by the State Treasurer and individual comptrollers. The second is by allocations and allotments and is enforced by OB for all departments receiving appropriations, except for the legislative branch.
Departments receive authorization to spend and commit funds in the form of appropriations for a specific amount, purpose and time period. Funds appropriated to a single department may be in one or more appropriations as the General Assembly determines. When multiple appropriations to a department are enacted, separate appropriations are made for general operating expenses, special outlays and for specific programs or groupings thereof. The degree to which a department’s total appropriations are itemized may vary, but control is exercised over both total and individual appropriations.
The Constitution requires that with the exceptions named, monies may be paid from the Treasury only if appropriated by law. Accordingly, when a voucher is submitted to the State Treasurer, a check will not be issued unless the amount is within the balance of the agency’s total appropriation.
Departments are prevented by their comptrollers from incurring obligations in excess of their unexpended individual appropriations by an encumbrance system. Encumbrance control prevents spending beyond remaining individual appropriation balances. When a commitment or obligation is incurred, for example, when a contract or purchase order is signed, the required portion of the corresponding appropriation is reserved. This reserving of funds is called the encumbrance procedure. All obligations anticipating future disbursement of cash in the fiscal year require an encumbrance, with the exception of debt service payments. Since a debt service appropriation is used for no purpose other than debt service, an encumbrance is not necessary.
All individual appropriations are allocated by OB to departments by major object groups. For example, a department’s appropriation for operating expenses may be broken down into such major object groups as personnel service, operating expenses and supplies, etc. Additionally, major object groups are subdivided into minor object groups. For example, personnel service would be broken down into salaries, benefits, overtime, etc. Department expenditures are monitored to insure that expenditures within an allocation do not exceed the designated totals. The departments, however, are free to adjust their expenditures between minor object groups as long as they do not exceed the major object group allocation. OB can monitor department expenditures against their allocations on a continuing basis as the records of departments under the Governor’s jurisdiction can be accessed from the central system while those of most other departments and branches are provided monthly.
In addition to the preceding controls, another check is provided by the financial reporting process. All department records are reconciled by OB on a monthly basis with the Treasury Department’s records of cash transactions and with the Department of Revenue’s records of cash collections.
Audits
The Constitution requires that the financial affairs of any entity receiving appropriations and all department boards, commissions, agencies, instrumentalities, authorities and institutions of the Commonwealth be subject to
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audits made in accordance with generally accepted auditing standards. Any Commonwealth officer whose approval is necessary for any transaction may not be charged with the function of auditing that transaction after its occurrence.
The Department of the Auditor General has the responsibility for auditing all state-related financial transactions except its own, those of the legislative and judicial branches, and boards and commissions on which the Auditor General serves and those of certain funds. At least one audit must be made annually of the fiscal affairs of the executive branch. Audits of the Commonwealth General Purpose Financial Statements since fiscal 1985 have been performed jointly by the Department of the Auditor General and an independent public accounting firm.
The Treasury Department is required to pre-audit all requests for expenditures to insure that they are in accordance with law. In addition, OB conducts, as a matter of administrative policy, periodic audits of comptrollers under the Governor’s jurisdiction and performance audits of state and federal programs.
COMMONWEALTH FINANCIAL STRUCTURE AND PROCEDURES
The Pennsylvania Constitution and the laws of the Commonwealth require all payments from the State Treasury, with the exception of refunds of taxes, licenses, fees and other charges, to be made only by duly enacted appropriations. Amounts appropriated from a fund may not exceed its actual and estimated revenues for the fiscal year plus any unappropriated surplus available. Appropriations from the principal operating funds of the Commonwealth (the General Fund, the Motor License Fund and the State Lottery Fund) are generally made for one fiscal year and are returned to the unappropriated surplus of the fund (a lapse) if not spent or encumbered by the end of the fiscal year. The Commonwealth’s fiscal year begins July 1 and ends June 30. (Fiscal year 2012 refers to the fiscal year ending June 30, 2012.) See Appendix C for a further description of the fiscal administration of the Commonwealth.
Description of Funds
The Commonwealth utilizes the fund method of accounting. For purposes of governmental accounting, a “fund” is defined as an independent fiscal and accounting entity with a self-balancing set of accounts. Each fund records the cash and/or other resources together with all related liabilities and equities that are segregated for the purpose of the fund. In the Commonwealth, funds are established by legislative enactment or in certain limited cases by administrative action. Over 150 funds have been established and currently exist for the purpose of recording the receipt and disbursement of moneys received by the Commonwealth. Annual budgets are adopted each fiscal year for the principal operating funds of the Commonwealth and several other special revenue funds. Expenditures and encumbrances against these funds may be made only pursuant to appropriation measures enacted by the General Assembly and approved by the Governor.
The General Fund, the Commonwealth’s largest operating fund, receives all tax revenues, non-tax revenues and federal grants and entitlements that are not specified by law to be deposited elsewhere. The majority of the Commonwealth’s operating and administrative expenses are payable from the General Fund. Debt service on all bond indebtedness of the Commonwealth, except that issued for highway purposes or for the benefit of other special revenue funds, is payable from the General Fund.
The Motor License Fund receives all tax and fee revenues relating to motor fuels and vehicles except the revenues from the one-half cent per gallon of the liquid fuels tax, which are deposited in the Liquid Fuels Tax Fund for distribution to local municipalities. All revenues relating to motor fuels and vehicles are required by the Constitution to be used only for highway purposes. Most federal aid revenues designated for transportation programs and tax revenues relating to aviation fuels are also deposited in the Motor License Fund. Operating and administrative costs for the Department of Transportation and other Commonwealth departments conducting transportation related programs, including the highway patrol activities of the Pennsylvania State Police, are also paid from the Motor License Fund. Debt service on bonds issued by the Commonwealth for highway purposes is payable from the Motor License Fund.
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Other special revenue funds have been established by law to receive specified revenues that are appropriated to departments, boards and/or commissions for payment of their operating and administrative costs. Such funds include the Game, Fish, Boat, Banking Department, Milk Marketing, State Farm Products Show, Environmental Stewardship, State Racing, and Tobacco Settlement Funds. Some of these special revenue funds are required to transfer excess revenues to the General Fund, and some receive funding, in addition to their specified revenues, through appropriations from the General Fund.
The Tobacco Settlement Fund is a special revenue fund established to receive tobacco litigation settlement payments paid to the Commonwealth. The Commonwealth is one of forty-six states that settled certain smoking-related litigation in a November 1998 master settlement agreement with participating tobacco product manufacturers (the “Tobacco MSA”). Under the Tobacco MSA, the Commonwealth is entitled to receive a portion of payments made pursuant to the Tobacco MSA by tobacco product manufacturers participating in the Tobacco MSA. Most revenues to the Tobacco Settlement Fund are subject to annual appropriation by the General Assembly and approval by the Governor.
The Budget Stabilization Reserve Fund is a special revenue fund designated to receive a statutorily determined portion of the budgetary basis fiscal year-end surplus of the General Fund, as was its predecessor fund, the Tax Stabilization Reserve Fund. The Budget Stabilization Reserve Fund was established in July 2002 after the Tax Stabilization Reserve Fund was abolished and its balance transferred to the General Fund for the 2002 fiscal year budget. The Budget Stabilization Reserve Fund is to be used for emergencies threatening the health, safety or welfare of citizens or during downturns in the economy that result in significant unanticipated revenue shortfalls not able to be addressed through the normal budget process. Assets of the Budget Stabilization Reserve Fund may be used upon recommendation by the Governor and an approving vote by two-thirds of the members of each house of the General Assembly. For GAAP (as defined below) reporting purposes, the Budget Stabilization Reserve Fund (previously designated the Tax Stabilization Reserve Fund) has been reported as a fund balance reservation in the General Fund (governmental fund category) since fiscal year 1999. Prior to that fiscal year, the Tax Stabilization Reserve Fund was reported, on a GAAP basis, as a designation of the General Fund unreserved fund balance. See “Budget Stabilization Reserve Fund and Tax Stabilization Reserve Fund” below.
The Commonwealth maintains trust and agency funds that are used to administer funds received pursuant to a specific bequest or as an agent for other governmental units or individuals.
Enterprise funds are maintained for departments or programs operated like private enterprises. Two of the largest of such funds are the State Stores Fund and the State Lottery Fund. The State Stores Fund is used for the receipts and disbursements of the Commonwealth’s liquor store system. Sale and distribution of all liquor within Pennsylvania is a government enterprise. The State Lottery Fund is also an enterprise fund for the receipt of all revenues from lottery ticket sales and lottery licenses and fees. Its revenues, after payment of prizes and all other costs, are dedicated to paying the costs of programs benefiting the elderly and handicapped in Pennsylvania.
In addition, the Commonwealth maintains funds classified as working capital, bond, and sinking funds for specified purposes.
Accounting Practices
Financial information for the principal operating funds of the Commonwealth is maintained on a budgetary basis of accounting. The Commonwealth also prepares annual financial statements in accordance with generally accepted accounting principles (“GAAP”). Annual financial statements prepared in accordance with GAAP are audited jointly by the Department of the Auditor General and an independent public accounting firm.
Budgetary Basis
A budgetary basis of accounting is used for ensuring compliance with the enacted operating budget and is governed by applicable statutes of the Commonwealth and by administrative procedures. The Constitution provides that operating budget appropriations shall not exceed the actual and estimated revenues and unappropriated surplus available in the fiscal year for which funds are appropriated. Annual budgets are enacted for the General Fund and
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certain special revenue funds that together represent the majority of expenditures of the Commonwealth. The annual budget classifies fund revenues as Commonwealth revenues, augmentations, federal revenues, or restricted receipts and revenues. Commonwealth revenues are revenues from taxes and from non-tax sources such as licenses and fee charges, penalties, interest, investment income and other miscellaneous sources. Augmentations consist of departmental and institutional billings that supplement an appropriation of Commonwealth revenues, thereby increasing authorized spending. For example, patient billings for services at Commonwealth-owned institutions are augmentations that supplement Commonwealth revenues appropriated to each institution for operating costs. Federal revenues are those federal aid receipts that pay for or reimburse the Commonwealth for funds disbursed for federally assisted programs. Restricted receipts and revenues are funds that are restricted to a specific use or uses by state law, administrative decision, or the provider of the funds. Only Commonwealth revenues and expenditures from these revenues are included in the computation made to determine whether an enacted budget is constitutionally balanced. Augmenting revenues and federal revenues are considered to be self-balancing with expenditures from their respective revenue sources.
The Commonwealth’s budgetary basis financial reports for its governmental funds are based on a modified cash basis of accounting as opposed to the modified accrual basis prescribed by GAAP. Under the Commonwealth’s budgetary basis of accounting, tax receipts, non-tax revenues, augmentations and all other receipts are recorded at the time cash is received. An adjustment is made at fiscal year-end to include accrued unrealized revenue; that is, revenues earned but not collected. Revenues accrued include estimated receipts from (i) sales and use, personal income, realty transfer, inheritance, cigarette, liquor, liquid fuel, fuels, and oil company franchise taxes, and interest earnings, and (ii) federal government commitments to the Commonwealth. Expenditures are recorded at the time payment requisitions and invoices are submitted to the Treasury Department for payment. Appropriated amounts are reserved for payment of contracts for the delivery of goods or services to the Commonwealth through an encumbrance process. Unencumbered appropriated funds are automatically lapsed at fiscal year-end and are available for re-appropriation. Estimated encumbrances are established at fiscal year-end to pay certain direct expenditures for salaries, wages, travel, and utility costs payable against current year appropriations but disbursed in the subsequent fiscal year. Recording of the applicable expenditure liquidates the encumbered amount. Over-estimates of fiscal year-end encumbrances are lapsed in the subsequent fiscal year and under-estimates are charged to a subsequent fiscal year appropriation. Appropriation encumbrances are shown on the Commonwealth’s balance sheet as a reservation of fund balance.
Other reservations of fund balance include (i) the unexpended balance of continuing appropriations (that is, appropriations that do not lapse at fiscal year-end), and (ii) requested appropriation supplements and deficiency appropriations. Revenues dedicated for specific purposes and remaining unexpended at the fiscal year-end are likewise reserved.
GAAP Financial Reporting
At fiscal year-end, budgetary basis fund financial information, both revenues and expenditures, is adjusted to reflect appropriate accruals for financial reporting in conformity with GAAP. The Commonwealth is not required to prepare GAAP financial statements and does not prepare them on an interim basis. GAAP fund financial reporting requires a modified accrual basis of accounting for governmental funds, while proprietary and fiduciary funds are reported on the accrual basis of accounting.
Fund financial statements of the Commonwealth prepared under GAAP differ from those traditionally prepared on a budgetary basis for several reasons. Among other differences, the GAAP fund financial statements (i) generally recognize revenues when they become measurable and available rather than when cash is received, (ii) report expenditures when goods and services are received and a liability incurred rather than when cash is disbursed, (iii) include a combined balance sheet for the Commonwealth presented by GAAP fund type rather than by Commonwealth fund, and (iv) include activities of all funds in the reporting entity, including agencies and authorities usually considered as independent of the Commonwealth for budgetary purposes. Adjustments to budgetary basis revenues and expenditures required to conform to GAAP accounting generally require including (i) corporation, sales, and personal income tax accruals, (ii) tax refunds payable and tax credits, and (iii) expenditures incurred but not yet posted as expenditures or not covered by appropriations.
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An independent public accounting firm and the Department of the Auditor General jointly audit the Commonwealth’s annual GAAP basis financial statements. The Commonwealth’s independent public accounting firm, KPMG LLP, has not been engaged to perform and has not performed, since the date of its report on the Commonwealth’s Comprehensive Annual Financial Report (CAFR) for the fiscal year ended June 30, 2012, which is incorporated herein by reference, any procedures on the financial statements addressed in that report nor has it performed any other procedures specifically relating to this Official Statement. The audited Basic Financial Statements are a component of the Commonwealth’s Comprehensive Annual Financial Report (“CAFR”). The CAFRs for recent fiscal years, including the fiscal year ended June 30, 2012, have been filed with the Municipal Securities Rulemaking Board via its Electronic Municipal Market Access system (“EMMA”) and are available from EMMA (http://www.emma.msrb.org) and at the Budget & Financial Reports section of the Office of the Budget’s web site - www.budget.state.pa.us - and such CAFRs are incorporated herein by reference. In February 2004, the Commonwealth restated its GAAP basis financial statements for the fiscal year ended June 30, 2002, for reasons discussed in “COMMONWEALTH FINANCIAL PERFORMANCE – Restatement of Financial Statements.” The Commonwealth has filed both the restated financials and restated CAFR and has posted them at the Office of the Budget’s web site. Beginning with the CAFR for the fiscal year ended June 30, 2002 and continuing in subsequent CAFRs, the Commonwealth has incorporated several new accounting and reporting standards that affect the comparability of financial information for those fiscal years to GAAP basis financial information reported for fiscal years prior to the adoption of such new standards. See “New Governmental Accounting and Reporting Standards” below.
New Governmental Accounting and Reporting Standards
Beginning with its GAAP basis financial statements for the fiscal year ended June 30, 2002, the Commonwealth adopted several new accounting and reporting standards established by the Governmental Accounting Standards Board in its Statements 33, 34, 35, 36, 37 and 38 (collectively, the “New Standards”). Among other things, the New Standards require presentation of government-wide and fund financial statements that constitute basic financial statements and replace general-purpose financial statements reported under former standards. Government-wide financial statements are intended to portray the government “as a whole” while fund financial statements provide fund-specific information. Government-wide financial statements are intended to describe the total cost of providing governmental services and disclose whether the Commonwealth’s financial condition improved or weakened during the fiscal year. Other features of the new government-wide financial statements are the reporting of infrastructure assets and related depreciation. Previously, the Commonwealth did not report infrastructure values or accumulated depreciation related to general fixed assets. As part of implementing the New Standards, effective July 1, 2001, the Commonwealth reclassified and/or restated numerous fund balance amounts previously reported at June 30, 2001 and reported governmental activities net assets at June 30, 2001. Note B to the financial statements in the June 30, 2002 CAFR provides a detailed explanation of the nature and amount of such restatements. The New Standards also require providing supplementary information, including a Management’s Discussion and Analysis of the financial statements. Beginning with fiscal year 2002 the Commonwealth also changed how functional expenditure categories are defined. All of these changes may hamper the comparability of GAAP basis financial information for fiscal years ended June 30, 2002 and later to financial reports for years prior to the implementation of the New Standards.
In February 2009, the Governmental Accounting Standards Board (GASB) issued Statement No. 54, “Fund Balance Reporting and Governmental Fund Type Definitions.” GASB Statement No. 54 changes the existing categories within governmental funds fund balances from the former Reserved, Unreserved and, within Unreserved, Designated and Undesignated fund balances, to the new Nonspendable and Spendable and, within Spendable, Restricted, Committed, Assigned and Unassigned categories. Also, governmental funds fund type classifications are clarified. As further disclosed in Note B to the June 30, 2011 CAFR, the Commonwealth’s implementation of GASB Statement No. 54 did not change any individual governmental fund’s fund balance but did change the categories reported within fund balance and did change fund type classification for 41 former Special Revenue funds. Effective July 1, 2010 the Commonwealth implemented the GASB Statement No. 54 and the changes may hamper the comparability of GAAP basis financial information, particularly as it relates to fund balances, for fiscal years beginning July 1, 2010 and later to financial reports for years prior to the implementation of GASB Statement
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No. 54. Note B to the financial statements in the June 30, 2011 CAFR provides a detailed explanation of the nature and amount of restatements of fund balances attributable to the implementation of GASB Statement No. 54.
Investment of Funds
The Treasury Department is responsible for the deposit and investment of most funds belonging to the Commonwealth, including the proceeds of the Bonds and the funds held for the payment of interest on and maturing principal of the Bonds. The Commonwealth’s Fiscal Code contains statutory limitations on the investment of funds by the Treasury Department. The Board of Finance and Revenue, a six-person board of state officials chaired by the State Treasurer, is authorized to establish the aggregate amount of funds that may be invested in some of the various categories of permitted investments. The State Treasurer ultimately determines the asset allocation and selects the investments within the parameters of the law.
The Commonwealth’s Fiscal Code permits investments in the following types of securities: (i) United States Treasury securities and United States Agency securities maturing within two years of issue; (ii) commercial paper issued by industrial, common carrier or finance companies rated “Prime One” or its equivalent; (iii) certificates of deposit of Pennsylvania-based commercial banks, savings banks or savings and loans; (iv) repurchase obligations secured by Federal obligations; (v) banker’s acceptances written by domestic commercial banks with a Moody’s Investors Service “AA” rating or the equivalent by Standard & Poor’s Financial Services or Fitch’s Rating Service; and (vi) other non-equity investments not to exceed ten percent of assets subject to a “prudent investor” test. The Treasury Department maintains additional investment restrictions contained in its Investment Policy Guidelines. A summary of the Investment Policy Guidelines and a report on investment activity and performance of funds invested by the Treasury Department are contained in a report periodically prepared and publicly distributed by the Treasury Department.
The State Treasurer has been legislatively authorized to invest Commonwealth moneys in securities under the “prudent investor” standard since June 1999. The common investment pool operated by the State Treasurer for the investment of operating funds of the Commonwealth maintains a portion of its investments in securities subject to this test. The legislative authorization to invest in such securities presently expires on December 31, 2014.
Budget Stabilization Reserve Fund and Tax Stabilization Reserve Fund
Legislation enacted with the adoption of the fiscal year 2003 budget abolished the Tax Stabilization Reserve Fund and transferred its balance of $1.038 billion to the General Fund. That legislation also established a new reserve fund named the Budget Stabilization Reserve Fund and initially directed $300 million of funding from the General Fund be deposited to the fund during fiscal year 2003. Subsequently, the General Assembly repealed the $300 million transfer allowing that amount to remain in the General Fund to help offset anticipated revenue shortfalls to the fiscal year 2003 budget.
Balances in the Budget Stabilization Reserve Fund, the successor to the Tax Stabilization Reserve Fund, may be used to alleviate emergencies threatening the health, safety or welfare of the Commonwealth’s citizens or to offset unanticipated revenue shortfalls due to economic downturns. Income to the Budget Stabilization Reserve Fund is provided by the transfer of a legislatively determined portion of the General Fund budgetary basis unappropriated surplus at the close of a fiscal year, by investment income earned by the fund, and by specific appropriation from other available funds by the General Assembly. The Budget Stabilization Reserve Fund is intended to accumulate a balance equal to 6 percent of General Fund revenues. Beginning with fiscal year 2003, 25 percent of any fiscal year-end surplus is to be deposited into the Budget Stabilization Reserve Fund. Whenever the Budget Stabilization Reserve Fund balance reaches or exceeds a level equal to 6 percent of General Fund revenues, the proportion of the General Fund’s fiscal year-end balance to be transferred to the Budget Stabilization Reserve Fund is lowered from 25 percent to 10 percent. The General Assembly may appropriate additional amounts to this fund at any time. For fiscal year 2006, $171.4 million was transferred to the Budget Stabilization Reserve Fund from the General Fund, which represented the required statutory transfer of 25 percent of the $685.4 million unappropriated surplus balance. At the end of the 2007 fiscal year, the Commonwealth’s unappropriated surplus balance was $707.8 million which resulted in a statutorily required transfer of $176.9 million to the Budget Stabilization Reserve Fund. In July 2008, the statutory transfer of 25 percent of the Commonwealth’s unappropriated surplus balance was suspended for one year. The budgets for fiscal years 2009 and 2010 included no
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transfers into the Budget Stabilization Reserve Fund of any unappropriated surplus as no such surpluses existed at the end of fiscal years 2009 and 2010. The fiscal year 2010 budget included a transfer of the entire $755.0 million balance of the Budget Stabilization Reserve Fund to the General Fund to assist with the enactment of a balanced budget for fiscal year 2010. While the Commonwealth ended fiscal year 2011 with a $1.07 billion ending balance, under provisions of the American Recovery and Reinvestment Act of 2009 (‘‘ARRA’’), the Commonwealth was prohibited from depositing any funds into the Budget Stabilization Reserve Fund. In June 2011, the statutory transfer of 25 percent of the Commonwealth’s unappropriated surplus balance was suspended for one year. The Commonwealth ended fiscal year 2012 with an unappropriated surplus balance of $659.3 million and the required transfer to the Budget Stabilization Reserve Fund was suspended for one year. At present, the Commonwealth has a virtually zero balance in the Budget Stabilization Reserve Fund. Based on the official revenue estimate for the enacted budget for fiscal year 2013, the Commonwealth projects a preliminary fiscal year 2013 ending balance of $292.9 million, which would result in a statutory transfer of $73.2 million in June 2013.
Balances in the Budget Stabilization Reserve Fund are to be used only when emergencies involving the health, safety or welfare of the residents of the Commonwealth or downturns in the economy resulting in significant unanticipated revenue shortfalls cannot be dealt with through the normal budget process. Funds in the Budget Stabilization Reserve Fund may be appropriated only upon the recommendation of the Governor and the approval of a separate appropriation bill by a vote of two-thirds of the members of both houses of the General Assembly. Any funds appropriated from the Budget Stabilization Reserve Fund that are unspent are returned to the Budget Stabilization Reserve Fund.
COMMONWEALTH FINANCIAL PERFORMANCE
Recent Developments
The CAFR for the fiscal year ended June 30, 2012 was issued on December 19, 2012. The CAFR, beginning with the one issued for the fiscal year ended June 30, 2011, incorporates a new accounting and reporting standard with respect to fund balances that affect the comparability of financial information for that fiscal year and subsequent fiscal years to GAAP basis financial information reported for fiscal years prior to the adoption of the new standard. See the discussion in “COMMONWEALTH FINANCIAL STRUCTURE AND PROCEDURES – New Governmental Accounting and Reporting Standards” and below in “General Fund - Financial Results for Recent Fiscal Years (GAAP Basis (GAAP Basis)” and in “General Fund - Fiscal Year 2012 Financial Results (GAAP Basis).”
On June 30, 2012, the Commonwealth’s fiscal year 2013 budget was signed into law by the Governor. The fiscal year 2013 budget includes a projected increase in Commonwealth revenues, prior to reserves for tax refunds, of 3.3 percent over fiscal year 2012 receipts. The rate of growth was based upon a projection that national and state economic growth will continue at a modest rate. The enacted fiscal year 2013 budget limits spending growth to 2.3 percent on a year-over-year basis. See “Fiscal Year 2013 Budget.”
Introduction
The most recent Commonwealth audited financial statements are available in the CAFR issued by the Commonwealth for the fiscal year ended June 30, 2012 (“fiscal year 2012”), which was issued on December 19, 2012 and will be filed with EMMA in January 2013. The application in the CAFR for fiscal year 2002 and subsequent fiscal years of the New Standards affected the comparability of financial information for those fiscal years to GAAP basis financial information reported for earlier fiscal years. See “COMMONWEALTH FINANCIAL STRUCTURE AND PROCEDURES - New Governmental Accounting And Reporting Standards.” Information contained in the fund financial statements for fiscal years 2002 through 2011 continues to report what was reported for governmental funds in the General Purpose Financial Statements included in the CAFRs for prior fiscal years, although fund reclassifications and changed definitions for categories of expenditures for fiscal year 2002 and subsequent fiscal years hampers comparability to data for prior fiscal years. The application in the CAFR for fiscal year 2011 and subsequent fiscal years of GASB Statement No. 54 affects the comparability of financial information, in particular the presentation of fund balances, for that fiscal year and subsequent fiscal years to GAAP basis financial information related to fund balances reported for earlier fiscal years.
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Copies of CAFRs recently issued by the Commonwealth are available from (i) the Secretary of the Budget, Mr. Charles Zogby, Attn: Mr. Mike Higgins, 555 Walnut Street, 9th Floor, Harrisburg, Pennsylvania 17101 (Telephone (717) 425-6736), and (iii) the Budget & Financial Reports section of the Office of the Budget’s web site at www.budget.state.pa.us, which CAFRs are incorporated herein by reference. The basic financial statements for fiscal year 2012 are incorporated herein by reference. This means that (i) the incorporated information is considered part of this Official Statement, and (ii) such information should be reviewed by prospective purchasers of the Bonds as a part of their review of this entire Official Statement.
Government-Wide Financial Data (GAAP Basis)
Government-wide financial statements report financial position and results of activity for the Commonwealth as a whole. Government-wide statements do not report information fund-by-fund; rather, they reveal information for all governmental activities and all business-type activities in separate columns. In government-wide statements, for both governmental and business-type activities, the economic resources measurement focus and accrual basis of accounting are used, with revenues and expenses recognized when they occur, rather than when cash is received or paid. This results in assets including an estimate of the total amount of receivables due at fiscal year-end that are expected to be collected in the future. Capital assets are reported with acquisition or construction costs being reported when the assets are placed in service less accumulated depreciation. Reported liabilities include all liabilities, regardless of when payment is due, including bond principal, employee disability claims liability, and employee compensated absence liabilities.
Table 5 presents condensed financial statement information derived from the Commonwealth’s government-wide June 30, 2012 Statement of Net Assets and includes amounts for the “primary government” only.
Table 5
Governmental Activities
Business-Type
Activities Total
Assets:Cash and investments............................................... 9.9$ 4.2$ 14.1$ Capital assets (net)................................................... 31.9 - 31.9 All other assets........................................................ 7.4 1.6 9.0
Total Assets........................................................... 49.2$ 5.8$ 55.0$
Liabilities:Accounts payable..................................................... 6.0$ 0.8$ 6.8$ All other current liabilities....................................... 3.7 3.5 7.2
Total Current Liabilities................................... 9.7 4.3 14.0
Bonds payable.......................................................... 10.8 - 10.8 All other long-term liabilit ies................................... 5.1 2.6 7.7
Total long-term liabilities................................. 15.9 2.6 18.5
Total l iabilities..................................................... 25.6$ 6.9$ 32.5$
Net assets: Invested in capital assets, net of related debt............ 26.6$ -$ 26.6$ Restricted................................................................. 2.6 0.7 3.3 Unrestricted............................................................. (5.5) (1.9) (7.4)
Total Net Assets.................................................... 23.7$ (1.2)$ 22.5$
Condensed Statement of Net AssetsPrimary Government
Fiscal Year Ended June 30, 2012(In Billions)
________________________________________________________
Source: Comprehensive Annual Financial Report, fiscal year ended June 30, 2012.
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During the fiscal year ended June 30, 2012, the overall financial position (net assets) of the Commonwealth, including both governmental and business-type activities, decreased $0.2 billion, or 7.23 percent of total beginning net assets of $22.7 billion. For governmental activities, the net decrease in net assets was $0.6 billion or 2.35 percent of beginning net assets of $24.3 billion. The fiscal year 2012 decrease in governmental activities net assets ($0.6 billion) represents a $1.3 billion decrease from the fiscal year 2011 increase of $0.5 billion. The fiscal year 2012 decrease in Governmental Activities net assets represents a decline in the Commonwealth’s overall financial position when compared to the prior fiscal year ended June 30, 2011.
The fiscal year 2012 $0.4 billion increase in total net assets for business-type activities follows a $0.3 billion decrease during the prior fiscal year-ended June 30, 2011. The fiscal year 2012 increase is almost entirely attributable to a net assets decrease of $1.4 billion in the Unemployment Compensation Fund, partially offset by a $276 million increase in the State Lottery Fund.
Financial Data for Governmental Fund Types (GAAP Basis)
Governmental fund financial statements provide fund-specific information about the General Fund, the Motor License Fund, and the Tobacco Settlement Fund (initially reported for fiscal year 2002) and for other Commonwealth funds categorized as governmental funds and reported as such in the General Purpose Financial Statements of prior fiscal years. Where government-wide financial statements cover the entirety of the Commonwealth, fund financial statements provide a more detailed view of the major individual funds established by the Commonwealth. Fund financial statements further differ from government-wide statements in the use by the latter of the current financial resources measurement focus and the modified accrual basis of accounting.
The governmental funds balance sheet reports total fund balances for all governmental funds. Assets of the Commonwealth’s governmental funds (the General Fund, the Motor License Fund and the Tobacco Settlement Fund are major governmental funds) as of June 30, 2012 were $17,402.5 million. Liabilities for the same date totaled $11,495.6 million, leaving a fund balance of $5,906.9 million, a decrease of $85.6 million from the fund balance at June 30, 2011. On a fund specific basis, the fund balance for the General Fund decreased by $362.1 million, the fund balance for the Motor License Fund decreased by $310.5 million and the fund balance for aggregated non-major funds (including the Tobacco Settlement Fund) increased by $1,039.4 million. See “General Fund – Fiscal Year 2012 Financial Results.”
To help understand the relationship between the Commonwealth’s GAAP fund balance (fund perspective) for governmental funds and the Commonwealth’s governmental net assets (government-wide perspective) under the new presentation of financial information, the following reconciliation is presented:
Table 6
Fund Balances - Governmental Funds General Fund............................................................................................................... 1,259.3$ Motor License Fund.................................................................................................... 1,193.0 Nonmajor Funds.......................................................................................................... 3,454.6
Total Fund Balance - Governmental Funds............................................................ 5,906.9$
Plus: Capital Assets, including infrastructure................................................................ 50,331.3 Less: Accumulated depreciation................................................................................... (18,486.6) Plus: Deferred revenue................................................................................................ 2,240.2 Plus: Additional accrued receivables............................................................................. 6.0 Plus: Net assets of internal service funds..................................................................... 97.7 Plus: Inventories......................................................................................................... 112.1 Less: Long-term liabilit ies........................................................................................... (16,525.2)
Total Net Assets - Governmental Activities............................................................ 23,682.4$
Reconciliation of the Balance SheetGovermental Funds (Fund Perspective) to
the Statement of Net Assets - Governmental ActivitiesJune 30, 2012
(In Thousands)
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More detailed information with respect to the General Fund and the Motor License Fund, major operating funds that are categorized as governmental funds, is presented in Table 7 (General Fund) and in Table 9 (Motor License Fund).
The financial tables that follow containing GAAP basis financial data are unaudited but are derived from the Commonwealth’s audited financial statements. The discussion of financial performance on a budgetary basis for prior fiscal years is based on an analysis of budget numbers and not on numbers prepared in accordance with GAAP. Likewise, the discussion of the financial figures for the enacted budget for fiscal year 2013 reflects a budgetary basis analysis rather than a GAAP basis analysis.
General Fund
Financial Results for Recent Fiscal Years (GAAP Basis)
During the five-year period from fiscal year 2008 through fiscal year 2012, total revenues and other sources increased by an average of 3.1 percent annually. Tax revenues during this same period increased by an annual average of 0.18 percent with a portion of the average annual growth rate adversely impacted by a significant decline in tax revenue and revenues from other sources in fiscal years 2009 and 2010. During the past several fiscal years, fees and license income and other financing sources such as transfers from other funds have continued to become a larger portion of income to the General Fund. Expenditures and other uses during the fiscal years 2008 through 2012 rose at an average annual rate of 3.1 percent. Expenditures for the protection of persons and property during this period increased at an average annual rate of 3.3 percent; public education expenditures during this period decreased at an average annual rate of 0.5 percent; health and human services expenditures increased at an average annual rate of 5.4 percent; and capital outlays increased at an average annual rate of 85.9 percent. Commonwealth expenditures for direction and support services (state employees and government administration) decreased at an average annual rate of 3.3 percent during the fiscal years 2008 through 2012. The fund balance at June 30, 2012 totaled $1,259.3 million, a decrease of $362.1 million from the balance at June 30, 2011. As mentioned previously, (See “New Governmental Accounting and Reporting Standards”) the Commonwealth implemented GASB Statement No. 54 which addressed the reporting of fund balances. This implementation affects the comparability of fund balances for the fiscal year ended June 30, 2012 and subsequent years to those of prior years. Table 7 below presents fund balance information for fiscal years 2008 through 2010 according to the prior standards as well as the fund balance for the fiscal years 2011 and 2012 according to GASB Statement No. 54.
Table 7, on the following page, presents a summary of revenues and expenditures (GAAP basis) for the General Fund, (including the Budget Stabilization Reserve Fund) for the fiscal years 2008 through 2012.
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Table 7 Results of Operations–General Fund
GAAP Basis–Unaudited (In Thousands)
2008 2009 2010 2011 2012
Fund Balance — Beginning of Period ......... 3,370,866$ 2,974,101$ 515,178$ 284,803$ 1,621,435$ Restatements.................................................... - - - 280,420 -
Fund Balance — Beginning of Period, as Restated................ 3,370,866$ 2,974,101$ 515,178$ 565,223$ 1,621,435$
Revenues: Taxes............................................................... 26,390,658$ 24,117,729$ 24,284,811$ 25,883,652$ 26,577,129$ Licenses and fees.............................................. 372,854 385,330 607,334 466,089 526,547 Intergovernmental........................................... 15,419,122 17,897,156 21,847,421 23,597,695 20,276,131 Charges for sales and services........................... 1,384,136 1,191,920 984,762 1,438,536 1,449,895 Other revenues................................................. 364,730 21,463 221,264 228,079 353,198 O ther Financing Sources: Operating transfers in....................................... 119,514 189,329 738,871 1,063,293 424,622 Bonds issued and bond premiums...................... - - - - 51,847 Other additions................................................. 529 3,638 - - 108,263
TOTAL REVENUES AND OTHER SOURCES.. 44,051,543$ 43,806,565$ 48,684,463$ 52,677,344$ 49,767,632$
Expenditures: Direction and supportive services..................... 1,079,972$ 781,581$ 1,032,744$ 837,264$ 942,668$ Protection of persons and property.................. 3,546,365 3,897,371 4,126,432 4,161,954 4,035,121 Health and human services............................... 24,317,283 25,687,548 27,446,383 29,861,234 30,030,822 Public education............................................... 12,994,517 13,340,204 13,813,506 14,197,883 12,735,771 Recreation and cultural enrichment.................. 331,454 341,283 291,412 243,606 242,218 Economic development.................................... 1,122,067 1,115,359 1,025,104 962,010 744,342 T ransportation................................................. 24,853 48,969 59,121 48,003 42,962 Capital outlay................................................... 19,496 34,551 70,341 285,910 232,622 Debt service..................................................... 34 144 526 - 26,325 O ther Uses: Operating transfers out..................................... 1,012,267 1,018,478 1,049,269 1,023,268 1,096,921
TOTAL EXPENDITURES AND OTHER USES 44,448,308$ 46,265,488$ 48,914,838$ 51,621,132$ 50,129,772$
REVENUES AND OTHER SOURCES OVER(UNDER) EXPENDITURE AND OTHER USES (396,765) (2,458,923) (230,375) 1,056,212 (362,140)
Fund Balance — End of Period ..................... 2,974,101$ 515,178$ 284,803$ 1,621,435$ 1,259,295$
Components of Fund Balance Reserved for encumbrances............................... 568,678$ 785,864$ 806,181$ - - Reserved for advances and other....................... 2,016,633 2,270,413 913,303 - - Unreserved — designated.................................. 379,169 - - - - Unreserved — undesignated.............................. 9,621 (2,541,099) (1,434,681) - - Nonspendable................................................... - - - 123,156 240,975 Restricted......................................................... - - - 756,141 - Committed....................................................... - - - 1,063,613 1,276,671 Unassigned deficit ............................................. - - - (321,475) (258,351)
TOTAL FUND BALANCE................................ 2,974,101$ 515,178$ 284,803$ 1,621,435$ 1,259,295$
Fiscal Year Ended June 30
________________________ Source: Compiled from Office of the Budget, Comprehensive Annual Financial Report for fiscal years ended June 30, 2008 through 2012.
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__________________ Totals may not add due to rounding. (a) Only includes funds replacing Commonwealth funds. Fiscal year 2011 includes $229.6 million from a nursing home tax used to augment
appropriated funds for long-term care. For fiscal year 2012, this number is $215.4 million and for fiscal year 2013 it is estimated at $188.7 million. Fiscal year 2011 included $371.2 million, fiscal year 2012 included $373.9 million and fiscal year 2013 includes an estimated $330.9 million from a tax imposed on managed care organizations. Additionally, fiscal year 2011 included $120.9 million from a Statewide Quality Care Assessment. For fiscal year 2012, this number is $109 million and for fiscal year 2013 it is also $109 million.
(b) Includes prior year appropriation lapses and federal funds from the American Recovery and Reinvestment Act. (c) Provisions of ARRA prohibited the Commonwealth from depositing any funds in the Budget Stabilization Reserve Fund during fiscal year
2011.
Fiscal Year 2010 Financial Results
GAAP Basis. At June 30, 2010, the General Fund reported a fund balance of $284.8 million, a decrease of $230.4 million from the reported $515.2 million fund balance at June 30, 2009. On a net basis, total assets increased by $520.0 million to $9,837.0 million. Liabilities increased by $750 million to $9,552 million largely because of a captioning change in liability type for unclaimed property (escheats) liability from accounts payable amounting to $553 million, and higher amounts due to political subdivisions ($319 million) for a variety of agencies, including the Department of Public Welfare ($131 million), the Department of Education ($72 million), Executive Offices ($43 million), and the Department of Health ($38 million). The change in fund balance for the General Fund of -$230 million for fiscal year 2010 compares with a change in the fund balance of -$2,459 million for fiscal year 2009.
General Fund tax revenues increased overall by over $167 million (1 percent) during the fiscal year ended June 30, 2010. This net increase is attributable to two tax types: ‘other’ and cigarette. ‘Other’ taxes increased by $551 million, based on a new Gross Receipts Tax (amounting to approximately $533 million) imposed on Managed Care Organizations that are parties to Medicaid managed care contracts with the Department of Public Welfare. This revenue will allow the Commonwealth to draw down additional federal Medicaid matching funds for the Medical Assistance managed care program. Also, Cigarette taxes increased by $87 million as the result of increases to the cigarette tax by 25 cents per pack and an expansion of the tax to include little cigars. However, these two increases
Table 8 Sources, Uses and Changes in Unappropriated Balance
General Fund and Other Funding Sources — Unaudited Budgetary Basis Commonwealth Revenues Only
(In Millions)
Actual
Fiscal Year 2011 Actual
Fiscal Year 2012 Enacted
Fiscal Year 2013 Sources: Cash revenues ................................................................................... $ 27,497.2 $ 27,678.0 $ 28,590.0 Tax refunds ....................................................................................... (1,150.0) (1,275.0) (1,300.0) Additional resources available .......................................................... 0.0 0.0 0.0
Public Health and Human Services Assessments(a) ........................... 636.6 698.3 628.6
TOTAL SOURCES ...................................................................... $ 26,983.8 $ 27,101.3 $ 27,918.6
Uses: General fund appropriations ............................................................. $ 28,321.3 $ 27,185.6 $ 27,656.4 Expenditures from additional resources ............................................ 0.0 0.0 0.0
Lapses and other reductions(b) ........................................................... (3,341.1) (349.1) (0.0)
Public Health and Human Services Assessments(a) ........................... 636.6 698.3 628.6
TOTAL USES .............................................................................. $ 25,616.8 $ 27,534.4 $ 28,285.0
OPERATING BALANCE .................................................................... $ 1,367.0 $ (433.3) $ (366.4)
BEGINNING UNAPPROPRIATED BALANCE ................................ $ (294.2) $ 1,072.8 $ 659.0 ADJUSTMENT TO UNAPPROPRIATED BALANCE ...................... …... 19.7 …... TRANSFER (TO)/FROM BUDGET STABILIZATION RESERVE
FUND(c)
0.0 0.0 (73.2)
ENDING UNAPPROPRIATED BALANCE ....................................... $ 1,072.8 $ 659.0 $ 219.4
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were offset by decreases in both Personal income taxes ($227 million) and Corporation taxes ($219 million). Decreases in these tax types were directly attributable to declines in economic activity during the current fiscal year.
Intergovernmental revenues increased by $3.9 billion, net, resulting primarily from Federal participation in significantly higher expenditures for Medical Assistance and other types of health and human services expenditures. Over $2.6 billion of the increase is attributable to higher Federal revenues from the Federal American Recovery and Reinvestment Act of 2009 (ARRA). Combined licenses/fees/investment and other revenues increased by $422 million primarily because of 1) first-year revenues for Table Game Authorization Fees, amounting to $165 million, and 2) an increase in investment income of $150 million, and 3) increases of ‘other’ revenues of nearly $46 million. Charges for sales and services revenues decreased by $207 million primarily because of a $221 million decrease in certain Department of Public Welfare’s revenues related to Medicaid managed care, which were replaced by new tax revenues ($533 million, above).
Total General Fund expenditures increased by 6 percent during the fiscal year ended June 30, 2010, by over $2.6 billion. Reported expenditures for health and human services expenditures increased by $1,758 million, caused by a higher aggregate need for medical assistance, and income and/or cash grant assistance. Expenditures for Food Stamps, alone, increased by $555 million. Public education expenditures increased by $474 million, net, due primarily to Federally-funded (ARRA) subsidies/grants for basic education ($515 million), offset by a decrease in state-funded basic education ($358 million), net increases in Federally-funded (including ARRA) grants in assorted other programs of $361 million, offset by net decreases in assorted state-funded programs of $144 million, higher accrued liabilities ($80 million), a special education increase ($12 million), a pupil transportation increase ($6 million), and a public school employee social security increase (employer share)($23 million); also, a decrease in public school employee retirement (employer share)($44 million). Higher education subsidies expenditures were nearly flat, year over year. Protection of persons and property expenditures increased by $229 million primarily because of higher personnel costs for the Department of Corrections ($157 million) and higher overall expenditures for the Department of Environmental Protection of over $54 million. Direction and supportive services expenditures increased by $251 million because of higher year over year active employee healthcare expenditure accruals ($131 million), a lower amount of interfund revenue/expenditure eliminations ($90 million), higher compensated absences expenditures ($60 million), higher expenditures for the Treasury unclaimed property program ($46 million), offset by lower expenditures for several agencies financed by the General Fund ($76 million).
Reported Transfers to the General Fund increased by $550 million primarily because of Act 50 of 2009 (over $167 million from the Tobacco Settlement Fund, $60 million from the Oil and Gas Lease Fund and over $144 million from the Medical Care Availability and Reduction of Error Fund) and the General Fund Appropriation Act 10-A (General Fund budget) ($143 million from the Oil and Gas Lease Fund and over $19 million from the Keystone Recreation, Park and Conservation Fund).
Reported Transfers from the General Fund increased by $31 million, net of decreases, primarily because of 1) a $26 million increase in transfers to debt service funds, and 2) a new transfer to the Motor License Fund ($5 million).
Budgetary Basis. The continuing effects of the national economic recession again negatively impacted the Commonwealth’s economy during fiscal year 2010. While avoiding the contraction in the national economy from the prior fiscal year, the Commonwealth experienced only minimal economic growth in fiscal year 2010. High levels of unemployment and turbulent financial markets negatively impacted the Commonwealth’s revenues and receipts. General Fund revenues of the Commonwealth were below the certified estimate by $1,176.5 million or 4.1 percent during fiscal year 2010. Final Commonwealth General Fund revenues for the fiscal year totaled $27,648.2 million. Total fiscal year 2010 revenues, net of reserves for tax refunds and including public health and human services assessments, totaled $27,168.6 million. Total expenditures, net of appropriation lapses and including public health and human services assessments and expenditures from additional sources (federal ARRA funding), were $25,418.3 million, resulting in a preliminary operating balance for fiscal year 2010 of $1,750.3 million. However, after accounting for a negative fiscal year 2010 beginning balance of $2,799.5 million and an infusion of $755 million from the Budget Stabilization Reserve Fund, the Commonwealth ended fiscal year 2010 with an unappropriated surplus balance (i.e., a deficit balance) of -$294.2 million.
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Revenues available to the Commonwealth, net of reserves for tax refunds and transfers from the Budget Stabilization Reserve Fund but including public health and human service assessments, increased $2,450.1 million or nearly 10 percent during fiscal year 2010. Fiscal year 2010 net revenues (all sources but excluding transfers from the Budget Stabilization Reserve Fund) totaled $27,201.5 million, up from $24,750.6 million during fiscal year 2009. Public health and human service assessments increased $232.5 million during fiscal year 2010. General Fund revenues increased $2,118.4 million or 8.3 percent during fiscal year 2010 when measured on a year-over-year basis. Corporate tax receipts were $510.2 million, or 10.0 percent below estimate for fiscal year 2010. Year-over-year growth in corporate taxes was -5.3 percent during fiscal year 2010 as corporate net income tax collections declined 9.5 percent and capital stock and franchise tax receipts declined 3.4 percent while collections from the gross receipts tax declined 6.5 percent on a year-over-year basis. Personal income taxes were $308.3 million below the estimate, a shortfall of 3.0 percent versus the estimate, while year-over-year growth in personal income tax receipts was -2.3 percent. Personal income tax collections attributable to withholding increased slightly (0.7 percent) during fiscal year 2010 while tax collections from the non-withholding portion of the personal income tax declined 11.8 percent on a year-over-year basis. Sales and use taxes receipts were also below the fiscal year 2010 estimate by $362.1 million, a difference of -4.3 percent from the fiscal year estimate. Sales tax collections declined 1.3 percent during fiscal year 2010 as motor vehicle sales tax collections grew 3.8 percent but non-motor vehicle sales tax receipts declined 2.0 percent during fiscal year 2010. Stabilization in the Pennsylvania housing market led to realty transfer tax revenues growing slightly by 0.5 percent during fiscal year 2010 after dropping over 30 percent during fiscal year 2009. Non-tax revenues of the Commonwealth were 1.8 percent below the fiscal year 2010 estimate, led by realized losses on the investment of Commonwealth funds. However, non-tax revenues of the Commonwealth grew from $235.2 million in fiscal year 2009 to $2,738.2 million during fiscal year 2010, an increase of 1,064 percent. This increase was attributable to the transfer of various fund balances such as the Budget Stabilization Reserve Fund and other such balances to the General Fund. Reserves for tax refunds in fiscal year 2010 were $1,125 million, a decrease of 8.2 percent from the fiscal year 2009 reserves.
The fiscal year 2010 budget was enacted incrementally over the first half of fiscal year 2010. On August 5, 2009 the Governor signed into law, Act 1A, which provided $11 billion of appropriations towards the operation of critical public health and safety services and to fund general government operations for the Commonwealth. In signing Act 1A, the Governor also line-item vetoed nearly $13 billion of appropriations for fiscal year 2010. The resulting legislation was commonly referred to as a “bridge budget,” which provided full fiscal year 2010 funding for: 1) essential general government operations, including the payment of wages and salaries to most Commonwealth employees; 2) the payment of general obligation bond debt service; 3) the payment of appropriation and/or lease-supported debt of the Commonwealth; 4) the incarceration of convicted offenders within state correctional institutions; 5) the provision of state police services, and; 6) certain mandated costs for the provision of health and welfare programs. Funding for all other programs and services normally provided by the General Fund was vetoed by the Governor. Programs for which fiscal year 2010 funding was line-item vetoed included basic education funding and other such funding to Pennsylvania school districts, grants and aid payments to Commonwealth counties and other similar municipalities, economic development programs, certain health and welfare programs, public recreation and conservation programs and environmental protection efforts. The enacted fiscal year 2010 “bridge budget,” or Act 1A, provided appropriations totaling $10,967.9 million of Commonwealth funds against then estimated current law revenues, prior to reserves for tax refunds, of $25,560.6 million.
On October 9, 2009, the Governor signed into law the enacted fiscal year 2010 budget which provided appropriations and executive authorizations totaling $24,294.2 million, which was net of expenditures offset with federal funds and did not include appropriations for certain non-preferred institutions such as the state-related universities and museums. Appropriations for these institutions were approved by the General Assembly and signed into law by the Governor on December 17, 2009 and, net of approximately $8 million in line-item vetoes, totaled $690.2 million in fiscal year 2010.
On January 8, 2010, the Governor signed into law a bill expanding gaming in the Commonwealth. Act 1 of 2010 (“Act 1”) authorized certain table games at Pennsylvania casinos and was estimated to generate an additional $256 million in General Fund revenues during fiscal year 2010, derived mainly from upfront license fees. Act 1 imposes a 14 percent tax rate on most table game revenue and directs such revenues to the General Fund until such
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time as the balance in the Budget Stabilization Reserve Fund reaches $750.0 million. Annual recurring revenue to the General Fund from table games was estimated to be between $80 and $90 million.
Given the condition of the national economy, the fiscal year 2010 base revenue estimate was premised on the assumption that the Commonwealth would experience zero growth (0.0 percent) during fiscal year 2010. The fiscal year 2010 budget provided an estimated $808.2 million in recurring revenues from various sources. Included in the recurring revenues were the following revenue enhancements: $250 million from the legalization and taxation of table games at Pennsylvania casinos; $374 million from the suspension of the phase-out of the capital stock and franchise tax; $171 million from the re-direction from a dedicated use to the General Fund, of an existing $0.25 per pack tax on cigarettes; $100 million from enactment of an additional $0.25 per pack cigarette tax; $38.3 million from the suspension of certain tax credits; $44 million in revenue from the re-direction of revenues formerly dedicated to the Autocat fund; a re-direction of funds formerly dedicated to the Race Horse Development Fund; and a new $1.60 tax on a pack of small cigars. The budget for fiscal year 2010 also included $2,356.0 million in non-recurring revenues; $755 million from the Budget Stabilization Fund; $708 million from the Health Care Provider Retention Account; $100 million from the MCare Fund; $159 million from the Personal Income Tax; $203 million from the Oil and Gas Lease Fund; $150 million from the Tobacco Endowment Account; $190 million from a tax amnesty program; $80-90 million from a tax on table games at Pennsylvania casinos, which will begin to accrue in fiscal year 2011; $25 million from an increased transfer from the State Stores Fund; $18.8 million from the Keystone fund; $17.7 million from the suspension of the tobacco cessation program in the Tobacco Fund; and other smaller transfers from various funds. The fiscal year 2010 budget also utilized $3,063.0 million in available federal fiscal relief funds and lapses to offset state appropriations.
Education funding was expanded in the fiscal year 2010 budget by an additional $300 million provided through the Basic Education subsidy.
The fiscal year 2010 budget represented a 1.8 percent ($523.9 million) decrease over the fiscal year 2009 budget. The fiscal year 2010 budget reduced or eliminated funding for programs in nearly every Commonwealth agency. The budget reduced funding for over 300 programs and eliminated funding for over 100 programs, lowering General Fund spending by nearly $1,900.0 million. Nearly 3,000 Commonwealth positions were eliminated in fiscal year 2010, bringing the total reduction in the Commonwealth’s workforce to 4,767 positions since 2003.
Fiscal Year 2011 Financial Results
GAAP Basis. At June 30, 2011, the General Fund reported a fund balance of $1621.4 million, an increase of $1,336.6 million from the reported $284.8 million fund balance at June 30, 2010. On a net basis, total assets increased by $1002.0 million to $10,839.0 million. Liabilities decreased by $334 million to $9,218.0 million. The change in fund balance for the General Fund for fiscal year 2011 of $1,336.6 million for fiscal year 2011 compares favorably with changes in the fund balance of -$230.0 million for fiscal year 2010 and -$2,459.0 for fiscal year 2009.
General Fund tax revenues increased overall by $1,599 million (6.58 percent) during the fiscal year ended June 30, 2011. This overall increase is attributable to all tax types except Realty Transfer taxes, which decreased by $14 million when compared to the fiscal year ended June 30, 2010. Personal Income Taxes (PIT) increased due to higher taxable income for individuals. Tax collections during the fiscal year, before adding net tax accrual and subtracting tax refunds/credits, increased as follows: employer PIT amounts withheld and remitted increased by 2 percent, quarterly (estimated) remittances increased 16 percent and annual (accompanying tax returns filed) remittances increased by over 11 percent. Corporation taxes increased by $493 million, an increase of 11.92 percent, due primarily to increasing corporation profits and due to one-time revenues of $176 million; both of these factors increased year over year reported Corporate Net Income taxes. Reported Sales and Use Tax revenues increased by $302 million when compared to the prior fiscal year due to increases in taxable purchases as well as changes which accelerated remittances of Sales taxes withheld. Reported ‘Other’ taxes increased by $128 million, net, over the prior fiscal year due primarily to increases in the Department of Revenue’s Enhanced Revenue Collection program ($79 million), increased liquor taxes ($11 million), partially offset by decreases due to the end of the Tax Amnesty Program ($15 million). Also, ‘Other’ taxes increased by $23 million due to a year over year increase in Medicaid
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Managed Care Gross Receipts Tax. Finally, ‘Other’ taxes increased by $30 million due to a current fiscal year reclassification.
Intergovernmental revenues increased by $1.7 billion, net, resulting primarily from non-ARRA Federal participation ($1,376 million) as follows: a $1,264 million increase related to significantly higher year over year expenditures ($2,414 million higher) for Department of Public Welfare medical assistance and other types of health and human services expenditures; a $337 million increase for Education programs; partially offset by $80 million decreases in such non-ARRA Federal participation for both Department of Community and Economic Development and Department of Environmental Protection and a $65 million decrease for Department of Military and Veterans Affairs. For ARRA Federal participation ($267 million): a $145 million increase for Department of Public Welfare medical Assistance and other types of health and human services expenditures, an $111 million increase for Education programs, a $35 million increase for the Department of Environmental Protection and a $17 million increase for the Department of Military and Veterans Affairs; partially offset by a $27 million decrease for higher education and a $14 million decrease for the Department of Community and Economic Development.
Charges for sales and services revenues increased by $453 million, net, from the prior fiscal year due primarily to: Department of Public Welfare ($418 million increase, net) for first-year quality care assessments ($538 million), accrued revenues ($64 million), intergovernmental transfer ($30 million) and SPBP ($12 million), partially offset by lower capitation managed care assessments ($170 million), lower net nursing home assessments ($52 million) and lower net hospital assessments ($4 million); $152 million related to prior year active employee healthcare expenditures; $42 million of recurring payroll-related revenues and $17 million of sales of state property. These net increases ($629 million) were partially offset by lower revenue accruals as of June 30, 2011 ($166 million) and lower lease payments ($10 million) for the current fiscal year.
Combined licenses/fees/investment and other revenues decreased by $135 million, net, primarily due to: 1) prior fiscal year one-time licenses/fees revenues for Table Game Authorization Fees, amounting to $165 million, partially offset by current fiscal year net increases of $22 million; 2) an increase for investment income of $8 million: and 3) net decreases for ‘other’ revenues of $33 million. These net decreases ($168 million) were partially offset by amounts newly reported as part of the General Fund of $34 million.
Total General Fund expenditures increased by 5.7 percent during the fiscal year ended June 30, 2011, by over $2.7 billion.
Reported expenditures for health and human services expenditures increased by $2,414 million, due primarily to higher aggregate need for medical assistance, and income and/or cash grant assistance to individuals ($3,279 million). Of this increase, expenditures for Food Stamps increased by $308 million. The $3,279 million increase was partially offset by a $889 million decrease in year over year accrued expenditures. Expenditures for the Pharmaceutical Assistance Contract for the Elderly (PACE) program, which are newly reported as part of the General Fund, amounted to $243 million. Expenditures for the administration of the unemployment compensation benefits program increased by $41 million. Labor and Industry expenditures decreased by $209 million, primarily due to a current fiscal year reclassification from this category to capital outlay.
Public education expenditures increased by $384 million, net, due primarily to new Federally-funded (non-ARRA) basic education expenditures of $387 million, partially offset by a reduction in state-funded basic education expenditures of $140 million for a net year over year increase in basic education subsidies of $247 million; increased ARRA Federally-funded expenditures of $129 million; increased public school employee retirement (employer share) of $57 million; and increased expenditures for food and nutrition programs of $23 million. These increases ($456 million) were partially offset by a net decrease in accrued expenditures ($109 million) as of June 30 and net expenditure increases in a variety of programs ($81 million). In addition, higher education subsidies decreased by nearly $44 million.
Capital outlay expenditures increased by $216 million, based on year over year capital asset acquisition increases at state agencies as follows: Labor and Industry ($224 million), Pennsylvania Judiciary ($26 million), Public Welfare ($16 million) and Revenue ($10 million). These increases were partially offset by decreases in numerous other state agencies amounting to $60 million.
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Direction and supportive services expenditures decreased by $196 million, on a net basis, due primarily to a $158 million increase in expenditures for active employee healthcare in the prior fiscal year did not recur during the current fiscal year, a separate current fiscal year expenditure decrease of $72 million for active employee healthcare. These two decreases were partially offset a $25 million increase in expenditures related to annuitant healthcare during the current fiscal year.
Protection of persons and property expenditures increased by $36 million, on a net basis, primarily because of higher expenditures for state agencies as follows: Corrections -- personnel ($50 million), contracted services ($50 million) and other net increases ($9 million); Environmental Protection – increases in grants and subsidies ($48 million), and net increases in personnel and other expenditures ($7 million), partially offset by lower accrued expenditures ($10 million); Emergency Management—increases in grants and subsidies ($31 million); Insurance -- net increases for contracted services ($10 million), increases for accrued expenditures ($10 million) and net increases for grants and subsidies ($6 million); amounts newly reported as part of the General Fund ($13 million); Executive Offices – higher accrued expenditures ($27 million), partially offset by decreases in grants and subsidies ($14 million); and another increase of $8 million. These net increases ($245 million) were partially offset by expenditure decreases for the Department of Military and Veterans Affairs – lower accrued expenditures (over $111 million), Labor and Industry – lower accrued expenditures ($28 million) and lower grants and subsidies ($11 million); the Pennsylvania Judiciary (over $35 million); and Department of State –a net decrease in accrued expenditures ($18 million) and net decreases in grants and subsidies ($5 million).
Reported Transfers to the General Fund increased by $324 million primarily because of a $244 million increase in Transfers from the Tobacco Settlement Fund, a $200 million increase from the State Lottery Fund to the PACE program (now financially reported as part of the General Fund), a $6 million transfer from the Unemployment Compensation Fund, a $5 million transfer from the Emergency Medical Services Operating Fund, and a $4 million transfer from the Small Business First Fund, offset by a $102.4 million decrease from the MCARE Fund, a $10.1 million decrease from the Keystone Recreation, Park and Conservation Fund, a $9.7 million decrease from the Gaming Fund, a $17.7 million decrease from the Oil and Gas Lease Fund and a net $4.9 million increase from several other funds during the fiscal year ended June 30, 2011.
Reported Transfers from the General Fund decreased by $26 million, net, primarily because of a $46.4 million decrease to the Community College Capital Fund, a $6 million decrease to the Educational Assistance Program Fund, a $2.8 million decrease to the Vocational Rehabilitation Fund, a $5.2 million decrease to the Motor License Fund, partially offset by a $42.3 million increase to debt service funds, and a net $7.9 million decrease to several other funds during the fiscal year ended June 30, 2011.
The overall increase in fund balance, over $1 billion during the fiscal year ended June 30, 2011, represents a significant year over-year improvement, when compared to the prior fiscal year decrease in total fund balance of $230 million. As result of the Commonwealth’s implementation of GASB Statement No. 54, the total reported fund balance of $1,621 million at June 30, 2011 includes amounts which were formerly reported as part of Special Revenue funds, amounting to $280 million at June 30, 2010 and $317 million at June 30, 2011. The previously reported General Fund fund balance included fund balance reservations of $1,719 million and an unreserved/undesignated deficit of $1,434 million at June 30, 2010. No fund balance designations were reported at June 30, 2010. At June 30, 2011, the General Fund fund balance is reported using the newer, prescribed categories as follows: Nonspendable: $123 million, Spendable, Restricted: $756 million and Spendable, Committed: $1,063 million and Unassigned deficit: $321 million. No fund balance assignments were reported at June 30, 2011.
Prior to the implementation of GASB Statement No. 54, the General Fund fund balance was $284.8 million as previously reported at June 30, 2010. Following the implementation of GASB Statement No. 54, the General Fund fund balance was increased by $280.4 million, resulting in an increased and restated fund balance of $565.2 million as of July 1, 2010. At June 30, 2011, total reported fund balance for the General Fund amounted to $1,621.4 million compared to $565.2 million, as restated as of July 1, 2010, for a year- over-year increase of $1,056.2 million.
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Budgetary Basis. While unemployment rates remained at elevated levels within Pennsylvania, the Commonwealth’s revenues and receipts benefitted from the moderate uptick in the national economy experienced during a portion of fiscal year 2011. General Fund revenues of the Commonwealth were above the certified estimate by $785.5 million or 2.9 percent during fiscal year 2011, the first time since fiscal year 2008. Final Commonwealth General Fund revenues for the fiscal year totaled $27,497.2 million. Total fiscal year 2011 revenues, net of reserves for tax refunds and including public health and human services assessments, totaled $26,983.8 million. Total expenditures, net of appropriation lapses and including public health and human services assessments and expenditures from additional sources (federal ARRA funding), were $25,616.8 million, resulting in a preliminary operating balance for fiscal year 2011 of $1,367.0 million. However, after accounting for a negative fiscal year 2010 beginning balance of $294.2 million, the Commonwealth ended fiscal year 2011 with an unappropriated surplus balance of $1,072.8 million, which was the largest such unappropriated ending balance since at least 1949, the earliest period for which such records are available. Additionally, the $1,072.8 million unappropriated ending balance during fiscal year 2011 was the largest such balance as a percent of the Commonwealth budget since at least fiscal year 1975.
Revenues available to the Commonwealth, net of reserves for tax refunds and transfers from the Budget Stabilization Reserve Fund but including public health and human service assessments, decreased $184.8 million or 0.7 percent during fiscal year 2011. Public health and human service assessments decreased $8.8 million during fiscal year 2011 to $636.6 million (See “Table 8”).
General Fund revenues decreased $150.9 million or 0.5 percent during fiscal year 2011 when measured on a year-over-year basis as compared to fiscal year 2010. However, this decline is due primarily to the use of the Budget Stabilization Reserve Fund and other such one-time balance transfers utilized during the 2010 fiscal year. Tax revenue collections grew $1,550.7 million or 6.2 percent on a year-over-year basis from fiscal year 2010 to fiscal year 2011 while non-tax revenue collections declined $1,701.6 million or 62.1 percent. Corporate tax receipts were $398.6 million above fiscal year 2010 levels. Year-over-year growth in corporate taxes was 15.6 percent during fiscal year 2011 as corporate net income tax collections increase 19.0 percent and capital stock and franchise tax receipts increased 7.6 percent while collections from the gross receipts tax declined 4.8 percent on a year-over-year basis. Personal income taxes were $467.0 million above fiscal year 2010 actual collection, year-over-year growth in personal income tax receipts was 4.7 percent. Personal income tax collections attributable to withholding increased by 2.1 percent during fiscal year 2011 and tax collections from the non-withholding portion of the personal income tax increased 14.4 percent on a year-over-year basis. Sales and use taxes receipts were $561.0 million greater during fiscal year 2011 than during the prior fiscal year, a growth rate of 7.0 percent. Sales tax collections increased during fiscal year 2011 as motor vehicle sales tax collections grew 6.7 percent and non-motor vehicle sales tax receipts increased 7.0 percent during fiscal year 2011. Cigarette tax collections grew 10.2 percent during fiscal year 2011 and inheritance tax collections grew 6.8 percent. The continued weakness in the national housing market led to realty transfer tax revenues declining 5.7 percent during fiscal year 2011. Non-tax revenues of the Commonwealth decline 62.1 percent during fiscal year 2011, due primarily to the utilization of one-time revenues during the prior fiscal year. Reserves for tax refunds in fiscal year 2011 were $1,150 million, an increase of 2.2 percent from fiscal year 2010 reserve levels.
Fiscal year 2011 appropriations from Commonwealth revenues, including supplemental appropriations and federal ARRA funding and net of appropriation lapses, totaled $28,321.3 million an increase of $485.4 million or 1.7 percent from fiscal year 2010 expenditures. Fiscal year 2011 ARRA funding and appropriation lapses increased to $3,341.1 million from $3,063.0 million in fiscal year 2010, an increase of 9.1 percent. A total of $275.2 million in appropriations were lapsed in fiscal year 2011, and the fiscal year 2011 budget contained a slightly reduced level of public health and human services assessments, $636.6 million, which were utilized to cover a portion of medical assistance and long-term care costs. These assessments replaced $636.6 million of General Fund medical assistance and long-term care costs in fiscal year 2011, compared to $645.4 million in fiscal year 2010, a decrease of 1.4 percent.
Commonwealth General Fund appropriations for fiscal year 2011 totaled $28,019.8 million, an increase of $379.3 million or 1.4 percent from fiscal year 2010 levels. A total of $3,055.0 million in operating appropriations were offset with federal funds, mainly ARRA, during fiscal year 2010. The Basic Education Funding subsidy to local school districts increased by $250.0 million or 4.5 percent. Funding for higher education programs was
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reduced by $19.1 million, or 1.0 percent. Commonwealth contributions to the Public School Employees Retirement System decreased $55 million or 16.1 percent from fiscal year 2010 levels. Spending for the Department of Corrections increased $82.0 million or 4.6 percent during fiscal year 2011 and medical assistance and human services spending increased by $81.4 million or 0.8 percent during fiscal year 2010.
The ending unappropriated balance was $1,072.8 million for fiscal year 2011. Under provisions of ARRA, the Commonwealth was prohibited from depositing any funds into the Budget Stabilization Reserve Fund. In June 2011, the statutory transfer of 25 percent of the Commonwealth’s unappropriated surplus balance was suspended for one year.
Fiscal Year 2012 Financial Results
GAAP Basis. At June 30, 2012, the General Fund reported a fund balance of $1,260.0 million, a decrease of $361.0 million from the reported $1,621.0 million fund balance at June 30, 2011. On a net basis, total assets increased by $261.0 million to $10,839.0 million. Liabilities increased by $622 million to $9,840.0 million. The negative change in fund balance for the General Fund for fiscal year 2012 of $361.0 million represents a decline from the net amount of changes in the fund balance of $1,336.0 million, which occurred during fiscal year 2011.
General Fund tax revenues increased overall by $693 million (2.68 percent) during the fiscal year ended
June 30, 2012. This overall increase is attributable to all tax types except the Corporation taxes and Cigarette taxes, which decreased by $154 million and $23 million when compared to the fiscal year ended June 30, 2011. Personal Income Taxes (PIT) increased due to higher taxable income for individuals. Tax collections during the fiscal year, before adding net tax accrual and subtracting tax refunds/credits, increased $306 million (3.1 percent). Corporation taxes decreased by $154 million, a decrease of 3.3 percent, due primarily to the continuing phase-out of the Capital Stock and Franchise tax. Reported Sales and Use Tax revenues increased by $363 million (4.4 percent) when compared to the prior fiscal year. Reported ‘Other’ taxes increased by $135 million, net, over the prior fiscal year.
Intergovernmental revenues decreased by $3,322.0 million, net, resulting primarily from the phase-out of Federal ARRA participation. Charges for sales and services revenues increased by $11 million, net, from the prior fiscal year. Combined licenses/fees/investment and other revenues increased by $186 million.
Total General Fund expenditures decreased by 2.9 percent during the fiscal year ended June 30, 2012, by nearly $1.5 billion.
Reported expenditures for health and human services expenditures increased by $170 million. Public education expenditures decreased by a net $1,462 million, net, due primarily to the phase-out of Federally-funded (ARRA and the Education Jobs Fund) grants for basic education. Capital outlay expenditures decreased by $53 million, on a year over year basis. Direction and supportive services expenditures increased by $105 million, on a net basis, due primarily to an increase in expenditures for active employee healthcare. Protection of persons and property expenditures decreased by $127 million, on a net basis. Reported Transfers from the General Fund increased by $74 million. Expenditures for economic development decreased $218 million from the prior year.
The overall decrease in fund balance of $362 million during the fiscal year ended June 30, 2012, represents a year over-year decline of 22.3 percent, when compared to the prior fiscal year total fund balance of $1,621.4 million.
At June 30, 2012, the General Fund fund balance is reported using the newer, prescribed categories as follows: Nonspendable: $240.9 million, an increase of $118 million; Spendable, Restricted: $0, a decrease of $756 million and Spendable, Committed: $1,276.7 million, an increase of $213 million and Unassigned deficit: $258.4 million, a decrease of $63 million.
As result of the Commonwealth’s implementation of GASB Statement No. 54, the total reported fund balance of $1,259.3 million at June 30, 2012 includes amounts which were formerly reported as part of Special Revenue funds.
Budgetary Basis. The subdued level of the economic recovery from the most recent national recession continued to affect the Commonwealth’s revenue receipts during fiscal year 2012. General Fund revenues of the
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Commonwealth were below the certified estimate by $162.8 million or 0.6 percent during fiscal year 2012. Final Commonwealth General Fund revenues for the fiscal year totaled $27,678.0 million. Total fiscal year 2012 revenues, net of reserves for tax refunds and including public health and human services assessments, totaled $27,101.3 million. Total expenditures, net of appropriation lapses and including public health and human services assessments and expenditures from additional sources, were $27,534.4 million, resulting in a preliminary operating balance for fiscal year 2012 of -$433.3 million. However, after accounting for a positive fiscal year 2012 beginning balance of $1,072.8 million, the Commonwealth ended fiscal year 2012 with an unappropriated surplus balance of $659.2 million, which was the second largest (following the $1,072.8 million ending balance from FY 2011) such unappropriated ending balance since prior to the last recession. (See “Table 8”).
General Fund revenues increased $180.8 million or 0.7 percent during fiscal year 2012 when measured on a year-over-year basis as compared to fiscal year 2011. Tax revenue collections grew $687.8 million or 2.6 percent on a year-over-year basis from fiscal year 2011 to fiscal year 2012 while non-tax revenue collections declined $507.2 million or 48.9 percent, primarily from a reduction in balance transfers from fiscal year 2011 to fiscal year 2012. Corporate tax receipts were $91.2 million lower than fiscal year 2011 levels. Year-over-year growth in corporate taxes was -3.1 percent during fiscal year 2012 as corporate net income tax collections decreased 5.1 percent and capital stock and franchise tax receipts increased 2.2 percent while collections from the gross receipts tax increased 8.6 percent on a year-over-year basis. Personal income taxes were $364.8 million above fiscal year 2011 actual collection and the year-over-year growth in personal income tax receipts was 3.5 percent. Personal income tax collections attributable to withholding increased by 3.5 percent or $282.9 million during fiscal year 2012 and tax collections from the non-withholding portion of the personal income tax increased 3.4 percent or $81.9 million on a year-over-year basis. Sales and use taxes receipts were $182.1 million greater during fiscal year 2012 than during the prior fiscal year, a growth rate of 2.1 percent. Sales tax collections increased during fiscal year 2012 as motor vehicle sales tax collections grew 9.2 percent and non-motor vehicle sales tax receipts increased 1.1 percent during fiscal year 2012. Cigarette tax collections decline 0.5 percent during fiscal year 2012 and inheritance tax collections grew 2.8 percent. Realty transfer tax revenues grew 4.7 percent during fiscal year 2012 after having declined in 2011. Non-tax revenues of the Commonwealth declined 48.9 percent during fiscal year 2012, due primarily to the utilization of one-time revenues during the prior fiscal year. Reserves for tax refunds in fiscal year 2012 were $1,275 million, an increase of 10.9 percent from fiscal year 2011 reserve levels.
Fiscal year 2012 appropriations from Commonwealth revenues, including supplemental appropriations and net of appropriation lapses, totaled $27,534.4 million. A total of $349.3 million in appropriations were lapsed in fiscal year 2012, and the fiscal year 2012 budget contained a slightly increased level of public health and human services assessments, $698.3 million, which were utilized to cover a portion of medical assistance and long-term care costs. These assessments replaced $698.3 million of General Fund medical assistance and long-term care costs in fiscal year 2012, compared to $636.6 million in fiscal year 2011, an increase of 9.7 percent.
Commonwealth General Fund appropriations for fiscal year 2012 totaled $27,185.6 million, a decrease of $1,135.7 million or 4.0 percent from fiscal year 2011 levels. The Basic Education Funding subsidy to local school districts declined 7.3 percent from the prior year. Funding for higher education programs was reduced by approximately 20 percent. Commonwealth contributions to the Public School Employees Retirement System increased 108.7 percent from fiscal year 2011 levels. Spending for the Department of Corrections was held flat at fiscal year 2011 levels during fiscal year 2011 and medical assistance and human services spending decreased by $54.6 million or 0.5 percent during fiscal year 2012.
The ending unappropriated balance was $659.2 million for fiscal year 2012. In June 2012, the statutory transfer of 25 percent of the Commonwealth’s unappropriated surplus balance was suspended for one year.
Fiscal Year 2013 Budget
The enacted fiscal year 2013 budget provides appropriations and executive authorizations, net of lapses and other reductions, totaling $28,285.0 million of Commonwealth funds against estimated revenues, net of tax refunds and including public health and human services assessments, of $27,918.6 million. The $366.4 million negative difference between estimated revenues and budgeted appropriations is to be mitigated by a partial draw down of the
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$659.2 million ending balance from fiscal year 2012. General Fund appropriations (prior to any lapses), from all revenue sources are estimated to grow $470.8 million or 1.7 percent on a year-over-year basis during fiscal year 2013. This modest increase follows a net reduction in state spending of over $1,159.9 million or 4.1 percent on a year-over-year basis during the prior fiscal year. The reduction in appropriations during fiscal year 2012 was the largest such reduction in the Commonwealth since at least 1970 and the fiscal year 2012 budget reset spending levels to those last seen in fiscal year 2009. The enacted fiscal year 2013 budget resets spending levels to the fiscal year 2010 levels. The fiscal year 2013 ending unappropriated balance is estimated to be $219.4 million following the statutory transfer of 25 percent of the Commonwealth’s unappropriated surplus balance to the Budget Stabilization Reserve Fund.
The fiscal year 2013 revenue estimate is based upon an economic assumption that economic growth will total 2.2 percent annual growth through June 2013. Total revenues of the Commonwealth, prior to reserves for refunds are expected to increase $912.0 million or 3.3 percent from fiscal year 2012 levels. The enacted budget for fiscal year 2013 includes tax reductions totaling $312.9 million, principally from the continued phase-out of the capital stock and franchise tax. Tax revenues of the Commonwealth are estimated to increase 3.4 percent from fiscal year 2012 levels. Fiscal year 2013 receipts from corporate tax receipts are projected to decrease 4.1 percent, after adjusting for a restart of the scheduled reduction in the capital stock and franchise tax rate reduction. Personal income tax receipts in fiscal year 2013 are expected to grow 4.5 percent on a year-over-year basis. Sales and use tax receipts are projected to increase 5.1 percent during fiscal year 2013. Non-tax revenues are projected to decline 3.8 percent.
Commonwealth General Fund appropriations for fiscal year 2013 total $27,656.4 million, an increase of $626.1 million or 2.3 percent from fiscal year 2012 levels. The Basic Education Funding subsidy to local school districts is increased by $49 million or 0.9 percent and $100 million in funding has been restored to the Accountability Block grant program for FY 2013. Funding for higher education programs is constant at fiscal year 2012 levels. The Educational Improvement Tax Credit program has also been expanded by $60 million for fiscal year 2013. Commonwealth contributions to the Public School Employees Retirement System are increased $255.9 million or 42.6 percent from fiscal year 2012 levels. Spending for the Department of Corrections is held to a zero percent growth during fiscal year 2013 and medical assistance and human services spending is budgeted to grow by just $24.8 million or just 0.2%.
The achievement of budgeted results may be adversely affected by a number of trends or events, including developments in the national and state economy. Deficits in the enacted budget can result from failures to timely receive projected revenues, inability to control or reduce expenses as projected, incurrence of unforeseen expenses, imposition of unforeseen obligations, whether of a legislative or litigation nature or resulting from a natural disaster, and a multitude of other causes. Cost cutting and revenue producing measures are less efficacious if imposed later in a fiscal year because of the shorter time period over which they will operate.
Motor License Fund
The Constitution requires all proceeds of motor fuels taxes, vehicle registration fees, license taxes, operators’ license fees and other excise taxes imposed on products used in motor transportation to be used exclusively for construction, reconstruction, maintenance and repair of and safety on highways and bridges and for debt service on obligations incurred for these purposes. The Motor License Fund is the fund through which most such revenues are accounted for and expended. Portions of certain taxes whose receipts are deposited into the Motor License Fund are legislatively restricted to specific transportation programs. These receipts are accounted for in restricted accounts in the Motor License Fund and are not included in the budgetary basis presentations or discussions on the Motor License Fund. The Motor License Fund budgetary basis includes only unrestricted revenue available for annual appropriation for highway and bridge purposes. The GAAP basis presentations include restricted account revenues and expenditures.
Financial Results for Recent Fiscal Periods (GAAP Basis)
The fund balance at June 30, 2012, was $1,193.0 million, a $310.5 million (20.7 percent) decrease from the June 30, 2011 fund balance. Over the five fiscal years 2008 through 2012, revenues and other sources have
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averaged an annual 0.7 percent increase. Expenditures and other uses during the same period have averaged a 2.95 percent annual increase.
Overall, total revenues decreased by $53.9 million during the fiscal year ended June 30, 2012; this represents a 1.1 percent increase from the prior fiscal year. Federal revenues increased by $126 million during fiscal year 2012 due mainly to an increase in federally-billable highway bridge expenditures. Tax revenues increased S3.8 million during fiscal year 2012 and licenses and fees revenues increased $14.5 million. The $390 million decrease in cash and investments is a result of expenditures exceeding revenues, on a cash basis, by $335 million. Other revenues of the Motor License Fund declined $89.6 million from the prior year due primarily to lower earned income from investments.
Overall, total expenditures increased by $206.5 million during the fiscal year ended June 30, 2012; this represents a 3 percent increase from the prior fiscal year. The combination of year over year increases in the highway maintenance budget ($68 million) and the creation of a new appropriation for disaster recovery ($58 million) accounted for nearly all of the increase in expenditures. Net transfers to other Funds increased by $5 million due primarily to the increase in Capital Bridge Debt Service payments of $10 million for the additional bridge bond issuance during fiscal year 2012 under the Capital Bridge Act of 2008-2009.
Table 9, on the next page, sets forth a condensed summary of revenues and expenditures (presented on a GAAP basis) for the Motor License Fund for the fiscal years 2008 through 2012.
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Table 9 Results of Operations–Motor License Fund
GAAP Basis–Unaudited (In Thousands)
2008 2009 2010 2011 2012
Fund Balance — Beginning of Period ......... 1,418,781$ 1,566,520$ 1,509,732$ 1,661,421$ 1,503,483$ Restatements.................................................... - 30,059 - - -
Fund Balance — Beginning of Period, as Restated................ 1,418,781$ 1,596,579$ 1,509,732$ 1,661,421$ 1,503,483$
Revenues: Taxes............................................................... 2,024,045$ 1,975,678$ 2,045,505$ 2,092,645$ 2,096,222$ Licenses and fees.............................................. 877,141 874,711 851,164 899,208 913,660 Intergovernmental........................................... 1,913,422 2,062,260 2,649,613 1,791,466 1,917,064 Other revenues................................................. 114,549 75,421 240,767 234,845 145,264 O ther Financing Sources: Operating transfers in....................................... 11,204 - 5,164 - - Other additions................................................. - - - 111 -
TOTAL REVENUES AND OTHER SOURCES.. 4,940,361$ 4,988,070$ 5,792,213$ 5,018,275$ 5,072,210$
Expenditures: Direction and supportive services..................... 66,993$ 71,167$ 61,906$ 50,624$ 58,679$ Protection of persons and property.................. 647,014 638,844 647,735 669,213 707,229 Public education............................................... 867 806 811 689 595 Recreation and cultural enrichment.................. 1,337 1,390 3,263 3,421 3,855 T ransportation................................................. 2,198,115 2,105,489 2,372,220 1,840,867 2,001,559 Capital outlay................................................... 1,793,459 2,217,691 2,502,788 2,548,674 2,542,787 O ther Uses: Operating transfers out..................................... 84,837 39,530 51,801 62,725 67,991
TOTAL EXPENDITURES AND OTHER USES 4,792,622$ 5,074,917$ 5,640,524$ 5,176,213$ 5,382,695$
REVENUES AND OTHER SOURCES OVER(UNDER) EXPENDITURE AND OTHER USES 147,739 (86,847) 151,689 (157,938) (310,485)
Fund Balance — End of Period ..................... 1,566,520$ 1,509,732$ 1,661,421$ 1,503,483$ 1,192,998$
Components of Fund Balance Reserved for encumbrances............................... 670,338$ 652,352$ 768,916$ -$ -$ Reserved for advances and other....................... 5,242 10,225 116,545 - - Unreserved - designated - highways................... 689,288 700,018 768,710 - - Unreserved - undesignated................................ 201,652 147,137 7,250 - - Restricted......................................................... - - - 1,503,483 1,192,998
TOTAL FUND BALANCE................................ 1,566,520$ 1,509,732$ 1,661,421$ 1,503,483$ 1,192,998$
Fiscal Year Ended June 30
___________________________________ Source: Compiled from Office of the Budget, Comprehensive Annual Financial Report for fiscal years ended June 30, 2008 through 2012.
The following budgetary basis information is derived from the Commonwealth’s unaudited budgetary basis financial statements.
Fiscal Year 2010 Financial Results
Budgetary Basis. Commonwealth revenues to the Motor License Fund totaled $2,641.1 million, an increase of $84.3 million (3.3 percent) over fiscal year 2009 revenues. Receipts from liquid fuels taxes increased by 1.8 percent while license and fee revenue decreased by 3.0 percent. Other revenue receipts increased by 17.6 percent during fiscal year 2010, due primarily to the realization of gains associated with Motor License Fund investments. Fiscal year 2010 Motor License Fund appropriations and executive authorizations totaled $2,627.7 million, a decrease of 3.6 percent from fiscal year 2009. The slightly decreased expenditure levels during fiscal year 2010 were the net result of increased funding made available from Act 44 and a decrease in non Act 44-related
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spending levels (which resulted in higher levels of fiscal year 2010 appropriation lapses). The Motor License Fund concluded fiscal year 2010 with an unappropriated surplus of $165.1 million, a net increase of 186 percent.
Fiscal Year 2011 Financial Results
Budgetary Basis. Commonwealth revenues to the Motor License Fund totaled $2,521.4 million, a decrease of $119.7 million (4.5 percent) over fiscal year 2010 revenues. Receipts from liquid fuels taxes increased by 2.9 percent while license and fee revenue increased by 4.0 percent. Other revenue receipts decreased by 31.4 percent during fiscal year 2011, due primarily to a decrease in the amount of revenue transferred to the Motor License Fund by the Pennsylvania Turnpike Commission pursuant to Act 44. Fiscal year 2011 Motor License Fund appropriations and executive authorizations totaled $2,402.9 million, a decrease of 8.6 percent from fiscal year 2010. The decreased expenditure levels during fiscal year 2011 were the net result of decreased funding made available from Act 44. The Motor License Fund concluded fiscal year 2011 with an unappropriated surplus of $318.0 million, a net increase of 93 percent.
Fiscal Year 2012 Financial Results
Budgetary Basis. Commonwealth revenues to the Motor License Fund totaled $2,414.4 million, a decrease of $107.2 million or 4.3 percent from fiscal year 2011 revenues. Receipts from liquid fuels taxes decreased by 1.2 percent while license and fee revenue increased by 0.1 percent. Other revenue receipts decreased by 27.6 percent during fiscal year 2012, due primarily to a decrease in one-time interest earnings that occurred during fiscal year 2011. Fiscal year 2012 Motor License Fund appropriations and executive authorizations totaled $2,614.8 million, an increase of 8.8 percent from fiscal year 2011. The Motor License Fund concluded fiscal year 2012 with an unappropriated surplus of $153.0 million, a net decrease of 51.9 percent. The net decrease in the unappropriated surplus was as result of expenditures exceeding available revenues by $200 million during fiscal year 2012.
Fiscal Year 2013 Budget
The fiscal year 2013 adopted budget includes an estimated $2,397.0 million from Commonwealth Motor License Fund revenues and Motor License Fund appropriations totaling $2,507.9 million. The enacted amount of appropriations represents a decrease of $106.9 million or 4.1 percent from the appropriated level for fiscal year 2012. The $110.9 million difference between the estimated fiscal year 2013 appropriations and revenues of the Motor License Fund is expected to be supported by the draw down of a portion of the fiscal year 2013 $153.0 million beginning balance. The projected fiscal year end 2013 unappropriated balance is estimated to be $42.1 million, a decline of 72.5 percent.
The achievement of the budgeted results may be adversely affected by a number of trends or events, including developments in the national and state economy.
State Lottery Fund
The Commonwealth operates a statewide lottery program that consists of various lottery games using computer sales terminals located throughout the state, and instant games using preprinted tickets. The net proceeds of all lottery game sales, less sales commissions and directly paid prizes, are deposited into the State Lottery Fund.
State Lottery Fund receipts support programs to assist elderly and handicapped individuals, primarily through property tax and rent rebate assistance and a pharmaceutical assistance program to recipients who meet specified income limits, and the provision of free mass transit rides during off-peak hours. Certain administrative costs and the payment to the General Fund of the personal income tax due on lottery prizes, which taxes and costs were previously paid from the State Lottery Fund, are now paid by the General Fund, beginning in fiscal year 2000.
Financial Results for Recent Fiscal Periods (GAAP Basis)
The total net assets of the State Lottery Fund at June 30, 2012, were -$68.9 million, a $49.7 million improvement from the June 30, 2011 fund balance of -$118.6. The improvement represents a 41.9 percent increase
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in total net assets. Over the five fiscal years 2008 through 2012, revenues have averaged an annual 3.4 percent increase while expenditures and other uses during the same period have averaged a 1.4 percent annual increase.
During the fiscal year ended June 30, 2012, the net year over year increase in overall gross revenues ($277.4 million) was primarily attributable to increased Lottery revenues ($270.1 million). The increase in sales and service revenues resulted from a record sales year during the fiscal year ended June 30, 2012. Approximately $213 million of the increased revenues were attributable to an increase in instant game sales versus the prior year. Instant game sales account for roughly 60 percent of overall game sales. A number of factors contributed to the increase in instant game sales including: continued growth of the retailer base; increases in vending equipment; and increases in the Lottery’s presence within outlets. Growth in Lottery revenues were also experienced in the Powerball and Mega Millions sales. Sales of both games are driven by the size of the jackpots. The top 10 jackpots for both games in fiscal year 2012 were significantly higher than the top 10 jackpots for the prior fiscal year. Overall gross revenues also grew in part due to a $9 million increase in earnings from long-term investments. Long term investments increased by $41 million as a result of a change in investment strategy implemented by the Commonwealth’s Treasury Department.
Reported fiscal year 2012 operating expenses of $3,315.0 million include: Lottery prize payments, program benefits for older Pennsylvanians and Lottery administration expenses. Reported prior fiscal year operating expenses were $3,036.4 million, which represents a 1.2 percent ($278.6 million) increase in operating expenses on a year over year basis. Approximately $279 million of the overall increase in operating expenses was attributable to an increase in sales activity. With increased sales, the State Lottery Fund experiences increases to the direct costs associated with the sales. A total of $1,100.0 million was used to fund programs benefitting older Pennsylvanians during fiscal year 2012.
Reported transfers to the State Lottery Fund decreased by $2 million and reported transfers from the State Lottery Fund increased by $2 million.
Table 10, on the following page, sets forth a condensed summary of revenues and expenditures (presented on a GAAP basis) for the State Lottery Fund for fiscal years 2008 through 2012.
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Table 10 Results of Operations–State Lottery Fund
GAAP Basis–Unaudited (In Thousands)
2008 2009 2010 2011 2012
Net Assets - Beginning of Period .................................... 348,278$ 135,824$ (144,537)$ (166,238)$ (118,585)$
Revenues: Lottery revenues.............................................. 3,100,596 3,087,962 3,051,640 3,206,588 3,476,663 Investment income.......................................... 1,461 (17,677) 2,894 4,681 13,562 Other revenues................................................. 101,316 110,836 113,043 114,586 114,785
O ther Financing Sources: Operating transfers in....................................... 100,186 48,500 176,700 165,900 164,100
TOTAL REVENUES AND OTHER SOURCES.. 3,303,559$ 3,229,621$ 3,344,277$ 3,491,755$ 3,769,110$
Expenditures: Operating expenses.......................................... 3,157,593$ 3,173,322$ 3,079,378$ 3,036,434$ 3,315,004$ Depreciation and amortization......................... 2,568 2,180 Other expenses................................................. - - 3 116,901 112,589 O ther Uses: Operating transfers out..................................... 358,420 336,660 286,597 288,199 289,610
TOTAL EXPENDITURES AND OTHER USES 3,516,013$ 3,509,982$ 3,365,978$ 3,444,102$ 3,719,383$
REVENUES AND OTHER SOURCES OVER(UNDER) EXPENDITURE AND OTHER USES (212,454) (280,361) (21,701) 47,653 49,727
Net Assets - End of Period.............................. 135,824$ (144,537)$ (166,238)$ (118,585)$ (68,858)$
Components of Net Assets Invested in capital assets, net of debt................ 11,473$ 12,264$ 8,576$ 11,749$ 16,083$ Restricted for elderly programs......................... 124,351 - - - - Deficit .............................................................. - (156,801) (174,814) (130,334) (84,941)
TOTAL NET ASSETS....................................... 135,824$ (144,537)$ (166,238)$ (118,585)$ (68,858)$
Fiscal Year Ended June 30
________________________________________________________
Source: Compiled from Office of the Budget, Comprehensive Annual Financial Report for fiscal years ended June 30, 2008 through 2012.
Fiscal Year 2010 Financial Results
Budgetary Basis. Fiscal year 2010 net revenues from lottery sources, including instant ticket sales and the State’s participation in the multi-state Powerball game, increased by 7.0 percent. Total funds available, including prior year lapses and net revenues received by the Lottery Fund during fiscal year 2010 were $1,663.9 million, while total appropriations, net of current year lapses were $1,562.5 million. Additionally, fiscal year 2010 expenditures included a transfer of approximately $178 million in long-term care costs from the Commonwealth’s General Fund to the State Lottery Fund. The fiscal year-end unappropriated balance and reserve was $101.4 million, a decrease of 10.4 percent.
Fiscal Year 2011Financial Results
Budgetary Basis. Fiscal year 2011 net revenues from lottery sources, including instant ticket sales and the State’s participation in the multi-state Powerball game, increased by 3.4 percent. Total funds available, including prior year lapses and net revenues received by the Lottery Fund during fiscal year 2011 were $1,704.2 million, while total appropriations, net of current year lapses were $1,545.2 million. Additionally, fiscal year 2011 expenditures included a transfer of approximately $178 million in long-term care costs from the Commonwealth’s General Fund to the State Lottery Fund. The fiscal year-end unappropriated balance and reserve was $159.0 million, an increase of 56.8 percent.
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Fiscal Year 2012 Financial Results
Budgetary Basis. Fiscal year 2011 net revenues from lottery sources, including instant ticket sales and the State’s participation in the multi-state Powerball game, decreased by 0.6 percent. Total funds available, including prior year lapses and net revenues received by the Lottery Fund during fiscal year 2012 were $1,693.6 million, while total appropriations, net of current year lapses were $1,602.1 million. Additionally, fiscal year 2012 expenditures included a transfer of approximately $178.0 million in long-term care costs from the Commonwealth’s General Fund to the State Lottery Fund. The fiscal year-end unappropriated balance and reserve was $263.3 million, an increase of 65.6 percent.
Fiscal Year 2013 Budget
The enacted fiscal year 2013 budget anticipates a 3.1 percent increase in revenues from all lottery sources, including instant ticket sales and the State’s participation in the multi-state Powerball game. Revenues of the State Lottery Fund are estimated to be $1,729.6 million in fiscal year 2013, an increase of $36.0 million from fiscal year 2012 actual receipts. A portion of the increased revenues is attributable to enactment during 2008 of revisions to the statutory profit requirement which dedicated a fixed percentage of gross ticket sales to certain programs. By reducing the profit requirement and increasing the payout, ticket sales revenues are expected to increase. Appropriations, less estimated lapses, totaling $1,770.5 million are expected, which represents an increase of $168.4 million or 10.5 percent from fiscal year 2012. As was the case in the fiscal year 2012 budget, the fiscal year 2013 budget contains expenditures of State Lottery Fund for long-term care as state funds from other sources are being offset to support such costs. During fiscal year 2012, this amounted to $178.0 million while in fiscal year 2013, the amount is $309.0 million. The fiscal year-end balance is projected to total $222.4 million, a decrease of 15.5 percent.
Trend projections for fiscal years beyond fiscal year 2013 show estimated program and administrative costs above estimated net revenues, as the forecasted rate of increase in program expenditures, primarily the pharmaceutical assistance program, is expected to outpace revenues. The estimated expenditures in excess of estimated revenues will be partially funded from a further draw-down of available reserves and balances in the State Lottery Fund. Based upon current projections, higher revenues and/or lower expenditures will be required for the State Lottery Fund to avoid the incurrence of an operating deficit in fiscal years subsequent to fiscal year 2013.
During fiscal year 2013, the Commonwealth, acting through the Office of the Budget and the Department of Revenue, have explored the possible private management of the Pennsylvania Lottery and are in the process of making a final determination to either the selection or rejection of bid proposals.
The achievement of the budgeted results may be adversely affected by a number of trends or events, including developments in the national and state economy.
COMMONWEALTH REVENUES AND EXPENDITURES
Recent Receipts and Forecasts
Table 11, on the next page, presents the Commonwealth revenue receipts, including net revenues accrued but not deposited, on a budgetary basis, for the major operating funds of the Commonwealth as actually received for fiscal years 2007 through 2012 and as enacted with respect to the fiscal year 2013 budget.
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Table 11 Commonwealth Revenues (a)
General Fund, Motor License Fund and State Lottery Fund - Unaudited Fiscal Year 2007 – Fiscal Year 2012 and Fiscal Year 2013 Enacted
(In Millions)
2007 2008 2009 2010 2011 2012Enacted 2013 (f)
General Fund Tax Revenues: Sales and use ..................................... 8,590.8$ 8,496.6$ 8,135.5$ 8,029.2$ 8,590.2$ 8,772.3$ 9,219.3$ Personal income ............................... 10,261.6 10,907.7 10,198.7 9,968.7 10,435.7 10,800.5 11,285.6 Corporate (b)..................................... 3,492.4 3,437.6 2,767.6 2,552.2 2,950.8 2,859.6 2,743.4 Public utility (c)................................. 1,340.8 1,393.6 1,418.7 1,326.2 1,259.6 1,358.7 1,447.1 Inheritance ....................................... 756.6 828.6 772.2 753.8 805.2 827.7 861.8 Financial and insurance (d) ................ 626.1 610.1 630.0 682.3 666.2 730.9 714.1 Cigarette ........................................... 778.6 784.1 754.2 976.1 1,075.4 1,069.9 1,071.8 Realty transfer .................................. 571.0 429.5 294.5 296.0 279.2 292.2 319.7 Alcoholic beverages (e) ..................... 264.7 277.4 292.5 297.6 307.7 324.0 336.0 Other ................................................ 1.4 128.0 30.8 27.9 90.7 112.7 81.8
TOTAL TAX REVENUES ............... 26,684.0$ 27,293.2$ 25,294.7$ 24,910.0$ 26,460.7$ 27,148.5$ 28,080.6$
Non-Tax Revenues: Liquor store profits ........................... 150.0$ 80.0$ 125.0$ 105.0$ 105.0$ 80.0$ 80.0$ Licenses, fees and miscellaneous........ 573.6 506.3 90.2 2,606.7 915.9 383.0 366.1 Fines, penalties and interest .............. 41.7 48.6 20.1 26.5 15.7 66.4 63.3
TOTAL NON-TAX REVENUES ...... 765.3$ 634.9$ 235.3$ 2,738.2$ 1,036.6$ 529.4$ 509.4$
TO TAL GENERAL FUND ................... 27,449.3$ 27,928.1$ 25,530.0$ 27,648.2$ 27,497.3$ 27,677.9$ 28,590.0$
Motor License Fund Tax Revenues: Liquid fuels ....................................... 589.2$ 591.7$ 520.5$ 548.9$ 568.0$ 561.4$ 559.5$ Fuels use ........................................... 162.8 157.1 149.6 145.3 152.0 155.7 157.3 Oil company franchise ...................... 462.8 447.7 452.8 448.0 455.0 457.9 452.9 Motorbus & alt fuels.......................... 40.6 40.0 40.3 41.7 43.7 49.0 49.9
TOTAL TAX REVENUES .............. 1,255.4$ 1,236.5$ 1,163.2$ 1,183.9$ 1,218.7$ 1,224.0$ 1,219.6$
Non-Tax Revenues: Licenses and fees .............................. 870.0$ 872.1$ 883.9$ 857.7$ 891.6$ 892.6$ 892.5$ Other and miscellaneous.................... 165.4 559.4 509.7 599.5 411.1 297.6 285.0
TOTAL NON-TAX REVENUES ...... 1,035.4$ 1,431.5$ 1,393.6$ 1,457.2$ 1,302.7$ 1,190.2$ 1,177.5$
TO TAL MO TO R LICENSE FUND ..... 2,290.8$ 2,668.0$ 2,556.8$ 2,641.1$ 2,521.4$ 2,414.2$ 2,397.1$
State Lottery Fund Non-Tax Revenues: Lottery revenues .............................. 1,465.8$ 1,405.6$ 1,389.8$ 1,332.6$ 1,389.5$ 1,515.4$ 1,560.3$ Other and miscellaneous ................... 32.9 34.2 21.2 177.8 171.9 178.2 169.3
TOTAL NON-TAX REVENUES ...... 1,498.7$ 1,439.8$ 1,411.0$ 1,510.4$ 1,561.4$ 1,693.6$ 1,729.6$
TO TAL STATE LO TTERY FUND ....... 1,498.7$ 1,439.8$ 1,411.0$ 1,510.4$ 1,561.4$ 1,693.6$ 1,729.6$
Fiscal Year Ended June 30
Source: Office of the Budget. Totals may not add due to rounding. (a) Budgetary basis including taxes and interest accrued but not deposited by the Commonwealth by June 30 of each fiscal year. (b) Includes the corporate net income and the capital stock and franchise taxes. (c) Includes the utility gross receipts and utility property taxes. (d) Includes the financial institution and insurance premium taxes. (e) Includes the liquor and malt beverage taxes. (f) As enacted for fiscal year 2013 (See Fiscal Year 2013 Budget for additional information).
Table 12, on the next page, presents a comparison of the actual revenues on a budgetary basis to the official revenue estimate used for budget enactment for the General Fund and the Motor License Fund for fiscal years 2005 through 2012.
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Table 12 Commonwealth Revenues — Official Estimate vs. Actual(a)
General Fund and Motor License Fund – Unaudited Fiscal Year 2005 — Fiscal Year 2012
(In Millions)
General Fund Motor License Fund Fiscal Year
Ended June 30 Official
Estimate(b) Actual Variance Official
Estimate (b) Actual Variance
2005.................................. $ 23,866.5 $24,308.5 $442.0 $2,101.9 $2,156.9 $55.0
2006.................................. 24,989.9 25,854.3 864.4 2,229.2 2,265.9 36.7
2007.................................. 26,799.5 27,449.3 649.8 2,322.8 2,290.8 -32.0
2008.................................. 27,760.6 27,928.1 167.5 2,757.5 2,667.9 -89.5
2009.................................. 28,784.4 25,529.8 -3,254.6 2,732.6 2,556.8 -175.8
2010.................................. 28,824.7 27,648.2 -1,176.5 2,636.1 2,641.1 5.0
2011..................................
2012..................................
26,711.7
27,840.8
27,497.2
27,678.0
785.5
-162.8
2,323.6
2,416.4
2,521.3
2,414.2
197.6
-2.2
___________________________
Source: Office of the Budget. (a)
Budgetary basis including taxes and interest accrued but not deposited by the Commonwealth by June 30 of each fiscal year. (b)
As certified for budget enactment.
Tax Revenues
Tax revenues constitute approximately 98.1 percent of Commonwealth revenues in the General Fund for the fiscal year ended June 30, 2012. The major tax sources for the General Fund of the Commonwealth are the personal income tax, the sales tax, the corporate net income tax, the capital stock and franchise tax, and the utility gross receipts tax. Together these five taxes produce 86.3 percent of General Fund tax revenues for the fiscal year ended June 30, 2012.
The major tax sources for the Motor License Fund are the liquid fuels taxes and the oil company franchise tax. Together these taxes produce nearly 44 percent of Motor License Fund revenues. Portions of certain taxes whose receipts are deposited into the Motor License Fund are legislatively restricted to specific transportation programs. These receipts are accounted for in restricted accounts in the Motor License Fund and are not included in the discussions of the tax revenues of the Motor License Fund.
The major tax sources for the General Fund and the Motor License Fund are described briefly below. The tax receipt amounts in the descriptions are on a budgetary basis.
Personal Income Tax. This tax accounted for $10,800.5 million or 39.0 percent of fiscal year 2012 General Fund Commonwealth revenues. The tax is levied at a flat rate on the taxable income of all residents and resident trusts and estates and taxable income attributable to Pennsylvania non-resident estates and trusts. The current tax rate of 3.07 percent became effective on January 1, 2004. Credit against the tax is allowed for gross or net income taxes paid to other states by Pennsylvania residents.
Withholding is required by employers from all persons liable for the tax with the size of collections determining the frequency for remittance to the Commonwealth. A declaration and partial payment of the estimated tax are required for those individuals with taxable incomes over $8,000 per year, other than wages subject to withholding.
Individuals and families meeting qualifying income limits do not pay personal income tax on all or a portion of their taxable income with the exemptions depending on their total income. A qualifying family of four owes no personal income tax on taxable income up to $32,000 annually.
Sales Tax. This tax accounted for $8,772.3 million or 31.7 percent of fiscal year 2012 General Fund Commonwealth revenues. The tax is levied at a rate of 6 percent on the sale, use, storage, rental or consumption of
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tangible personal property, cigarettes, and certain services, and upon the occupancy of hotel rooms. Substantial exemptions from the tax include clothing, food purchased in grocery stores or supermarkets, medical supplies, drugs, residential use of certain utilities, motor fuels, and machinery, equipment and items used in manufacturing, processing, farming or dairying, and utility service. The tax base was expanded in fiscal year 1992 to include a number of services not previously taxed. Beginning in fiscal year 1998, 1.22 percent of collections, up to an annual limit of $75 million, are transferred to a special fund for mass transit assistance. Beginning in fiscal year 2008 with the enactment of Act 44 of 2007, an additional 4.4 percent of receipts are transferred for transit assistance purposes.
Vendors collecting $600 or more of sales tax in the previous year’s third quarter are required to remit collections monthly within 20 days of the last day of the collection month.
Corporate Net Income Tax. The Commonwealth received $2,204.5 million, or 7.3 percent of fiscal year 2012 General Fund Commonwealth revenues, from this tax. The tax is paid by all domestic and foreign corporations for the privilege of doing business, carrying on activities, or employing capital or property in Pennsylvania and is levied on federal net taxable income with Pennsylvania modifications. Building and loan associations, banks, savings institutions, trust companies, insurance and surety companies, Pennsylvania S corporations and non-profit corporations are exempt from the tax. When less than the entire business of any corporation is transacted within the Commonwealth, the taxable income in Pennsylvania is determined by an apportionment formula.
The current tax rate of 9.99 percent became effective for fiscal years beginning on or after January 1, 1995. The previous tax rate of 11.99 percent had been in effect since January 1, 1994.
The corporate net income tax is to be paid in four equal installments throughout the corporation’s tax year based on estimated taxes due for the entire tax year. Any remaining portion of taxes due is to be paid with the corporation’s annual report due three-and-one-half months following the end of the corporation’s tax year.
Utility Gross Receipts Tax. This tax accounted for $1,330.0 million, or 4.8 percent of fiscal year 2012 General Fund Commonwealth revenues. The tax is levied on the gross receipts from business transacted within Pennsylvania by specified public utilities owned, operated or leased by corporations, associations or individuals. Public utilities owned or operated by a municipality or a municipal authority furnishing public utility services within the limits of the municipality are exempt from paying tax on the receipts arising from business done within the municipality. Beginning January 1, 2004, interstate and cellular telecommunications services are subject to the gross receipts tax. The tax rate is 50 mills, which became effective in July 1991, having been raised from its prior tax rate of 44 mills for all utilities except electric utilities, which are taxed at the rate of 44 mills. The tax rate for electric utilities is adjusted annually under provisions of a formula enacted with the deregulation of electric generation in Pennsylvania. Beginning with fiscal year 1999, 0.18 percent of receipts are transferred to a special fund for mass transit purposes. Revenue from 0.2 mills of the tax is deposited in the Alternative Fuels Incentive Grant Fund.
All firms, except public utilities owned or operated by a municipality or a municipal authority and motor transportation companies, are required to file estimated revenue reports annually, together with the tentative payment of the current year’s tax calculated by applying the current tax rate to 90 percent of the tax base for the preceding year. Effective for tax years after January 1, 2000, natural gas companies became exempt from the tax. The tax report and tentative payment are required to be made by March 15. The remaining tax is due and payable by the succeeding March 15.
Capital Stock and Franchise Taxes. These taxes generated $837.2 million for the Commonwealth in fiscal year 2012, or 3.0 percent of General Fund Commonwealth revenues. They are levied on the capital stock value of domestic and foreign corporations doing business or having property or capital employed in Pennsylvania on that portion of capital stock value apportionable to Pennsylvania under a statutory formula.
Capital stock and franchise tax tentative payments are payable quarterly based on 90 percent of the tax liability of the year preceding the immediate prior year. Under current law, the General Fund tax rate for tax years that began in 2012 is 1.89 mills, having been reduced from 2.89 mills effective January 1, 2012. This tax is scheduled to be phased out by annual rate reductions through 2014 under legislation enacted in 2002 and amended in 2003, 2006 and 2009.
Cigarette Tax. Collections of this tax totaled $1,069.9 million in fiscal year 2012, or 3.9 percent of General Fund Commonwealth revenues. The tax is imposed and assessed on the sale or possession of cigarettes within the
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Commonwealth. It is levied on the consumer but is collected by the sale of stamps and meter units to dealers who affix them to each package. The current rate is $1.60 per package of 20 cigarettes, which was increased by 25 cents in 2009. The 6 percent sales tax is also imposed on the retail sale of cigarettes. A portion of the collections from the tax are transferred to a special fund for children’s health insurance and to a special fund for preserving farmland.
Inheritance and Estate Taxes. Collections of these taxes were $827.7 million in fiscal year 2012, or 3.0 percent of General Fund Commonwealth revenues. The inheritance tax is levied on the value of property transferred to heirs of a deceased person. Prior to July 1, 2000, the tax rate was 6 percent of the value, if passing to lineal heirs, and 15 percent if passing to collateral heirs. Effective July 1, 2000, the tax rate on transfers to parents, grandparents and lineal descendents was lowered to 4.5 percent and a new tax rate of 12 percent on transfers to siblings was established. The estate tax is a “pick-up” tax in the amount of the maximum federal tax credit less State death taxes paid. Counties collect the inheritance and estate tax, which is due within nine months following the death of the person whose property is being transferred.
Insurance Premiums Tax. This tax is levied at the rate of 2 percent of the gross premiums (subject to retaliatory provisions) on all business of domestic and foreign insurance companies transacted within the Commonwealth during each calendar year. Revenues from the two percent tax on foreign fire and casualty companies accrues to special revenue funds while the remaining taxes accrue to the General Fund. The tax on foreign companies is based on the amount of business transacted in Pennsylvania. Marine insurance companies, both domestic and foreign, pay a 5 percent tax on underwriting profits attributable to Pennsylvania in lieu of the gross premium tax.
A 90 percent tentative payment is required for insurance companies, except foreign fire and casualty companies, calculated on the tax base of the preceding tax year. As an alternative, the taxpayer may elect to make a tentative payment in an amount not less than 90 percent of the tax as finally reported. Payments must be submitted by March 15 of each year, while the remaining amount due must be paid by April 15 of the following year.
Realty Transfer Tax. This tax is levied at the rate of 1 percent of the value of the real property transferred, as represented by deed, instrument or other writing. The tax is collected by the recorders of deeds in the counties and transmitted to the Commonwealth when collected. From July 1994 through December 2001, 15 percent of the revenues from this tax was transferred to the Keystone Recreation, Park and Conservation Fund, and the remaining portion was deposited in the General Fund. For the period from January 2002 through June 2002, the transfer amount was reduced to 10 percent; from July 2002 to June 2003, the transfer was reduced to 7.5 percent. Effective July 2003, the transferred amount is 15 percent. The fiscal year 2007 budget included a one-year suspension of the 15 percent transfer to the Keystone Recreation, Park and Conservation Fund. Beginning with fiscal year 2008, the 15 percent transfer to the Keystone Recreation, Park and Conservation Fund has been restored.
Liquor Tax. This tax is levied at the rate of 18 percent of the net purchase price on all liquor sold by the Pennsylvania Liquor Control Board. Revenues from this tax accrue to the General Fund. The 6 percent sales tax is also imposed on all liquor sold by the Pennsylvania Liquor Control Board and is included in the sales tax receipts.
Financial Institution Taxes. The bank shares tax is levied at the rate of 1.25 percent of the value of shares of state and national banks and title insurance companies. Each institution computes the tax base by averaging the share value, adjusted to exclude the value of United States obligations, for each quarter of the previous calendar year. A payment of the tax for the current tax year is due by March 15 of that year. Revenues of this tax are deposited into the General Fund.
The mutual thrift institutions tax is levied on the taxable net income of such institutions at the rate of 11.5 percent. Revenues of this tax accrue to the General Fund. Annually, the mutual thrift institutions are required to transmit tentative reports together with a tentative payment of the current year’s tax computed by applying the current tax rate to 90 percent of the tax base for the second preceding tax year. The taxpayer may elect to make a tentative payment at an amount not less than 90 percent of the tax as finally reported. Tentative reports and prepayments are due by March 15 of the current calendar year, with the remaining amount payable by April 15 of the next year.
Public Utility Realty Tax. The tax is levied on the state taxable value of utility real property belonging to a firm or other entity (i) furnishing utility service and (ii) regulated by the Pennsylvania Public Utility Commission or
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similar regulatory body. State taxable value is the current market value derived from assessed values for county real estate tax purposes. Certain items are specifically exempt from the tax. The tax rate for the General Fund portion of the tax is set annually by the Secretary of Revenue. The tax rate is to be set at a rate intended to produce revenues sufficient to reimburse local taxing authorities for foregone property tax revenues. Revenues from an additional 7.6 mill tax are deposited into a special revenue fund.
The tax is subject to a tentative payment of the then current year’s tax liability. The tentative reports and tax payments are due in May. The remaining tax payments must be paid in September.
Malt Beverage Tax. This tax is levied on all malt or brewed beverages sold in Pennsylvania. The tax rate is 2/3 cent per half-pint, 1 cent per pint and $2.48 per barrel. The various manufacturers pay the tax monthly to the Department of Revenue. Revenues from this tax are deposited into the General Fund.
Liquid Fuels Tax. This tax accounted for $561.4 million, or 21.0 percent of Motor License Fund Commonwealth revenues in fiscal year 2012. It is an excise tax imposed upon all liquid fuels used or sold within the Commonwealth. The tax is imposed upon and collected by the fuel distributor. After discounts, all monies collected are deposited in the Motor License Fund, except that an amount equal to one-half cent per gallon is deposited in the Liquid Fuels Tax Fund. Fuels sold and delivered to the U.S. government, the Commonwealth and any of its political subdivisions, public authorities, non-profit schools, volunteer fire companies, ambulance services, rescue squads, and fuels sold and delivered in interstate commerce are exempt from payment of the tax. In addition to these exemptions, reimbursement is made for fuels used for certain agricultural purposes. The present rate of the liquid fuels tax is 12 cents per gallon.
Oil Company Franchise Tax. This tax accounted for $457.9 million, or 17.2 percent of fiscal year 2012 Motor License Fund Commonwealth revenues. The tax is levied on the privilege of selling petroleum products subject to liquid fuels taxes (primarily gasoline) for transportation purposes at the rate of 153.5 mills upon each dollar of such revenues. The tax rate was increased by 38.5 mills in May 1997 to its current rate. By law, portions of the tax are dedicated to certain highway purposes, including transfers to local governments for roads and highways. Exemptions from the tax are the same as those provided from the liquid fuels tax.
Fuels Tax. This tax accounted for $155.7 million, or 5.8 percent of fiscal year 2012 Motor License Fund Commonwealth revenues. It is an excise tax imposed on fuels (primarily diesel fuel) used or sold within the Commonwealth. The tax is imposed upon and collected by the distributor. After discounts, all monies collected are deposited in the Motor License Fund, except an amount equal to one-half cent per gallon is placed in the Liquid Fuels Tax Fund for distribution to local governments. The present tax rate is 12 cents per gallon for fuel used in the Commonwealth.
Fuels exempt from this tax are those delivered in interstate commerce, those used by and sold to the Commonwealth and any of its political subdivisions, those sold and delivered to the U.S. government, those (less than 50 gallons) brought into the Commonwealth in the fuel tanks of motor vehicles, those used by public authorities, volunteer fire companies, ambulance services, rescue squads and non-profit schools, and those used for certain agricultural purposes.
Motor Carriers Road Tax. This tax is levied on motor carrier vehicles having a gross weight in excess of 26,000 pounds. All monies collected are deposited in the Motor License Fund. The current rate is 12 cents per gallon, plus an additional factor based on the oil company franchise tax for fuel used within the Commonwealth. In May 1997, the tax rate was reduced by 6 cents to its current level. The revenue lost from the tax reduction is being covered by an additional 55 mills tax rate for the oil company franchise tax. Both the repealed and the new tax portions are dedicated to bridge improvement.
Non-Tax Revenues
Licenses and Fees. License and fee receipts in the General Fund for fiscal year 2012 totaled $138.8 million, representing 0.5 percent of Commonwealth revenues to the General Fund. Revenues from motor vehicle licenses and fees in fiscal 2012 were $892.6 million, representing 33.5 percent of total fiscal year 2012 Motor License Fund Commonwealth revenues.
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Miscellaneous Revenue. Revenues from non-tax sources not categorized elsewhere are credited to miscellaneous revenues. Interest earnings on securities and deposits are included in this source. Miscellaneous revenues receipts in the General Fund for fiscal year 2012 totaled $244.2 million. Receipts from miscellaneous motor vehicle revenues in fiscal 2012 were $297.6 million, representing 12.3 percent of total fiscal year 2012 Motor License Fund Commonwealth revenues.
State Stores Fund Transfers. This is an amount determined by the Liquor Control Board to be available for transfer to the General Fund. The amount transferred for fiscal year 2012 was $80.0 million. In Pennsylvania, the distribution and sale of liquor is a state enterprise.
Fines, Penalties and Interest. This revenue source includes all fines, penalties and interest collected in the enforcement of tax regulations. The amount deposited to the General Fund for fiscal year 2012 was $66.4 million. The largest portion is from corporation tax penalties.
Tobacco Settlement Payments. The Commonwealth’s portion of payments made by cigarette manufacturers participating in the Tobacco MSA are deposited in the Tobacco Settlement Fund to be used for certain health-related programs. See “COMMONWEALTH FINANCIAL STRUCTURE AND PROCEDURES – Description of Funds.”
Federal Revenues
Receipts by the Commonwealth in its General Fund, Motor License Fund, Tobacco and State Lottery Fund from the federal government during fiscal year 2011 totaled $26.4 billion, while such federal receipts were $22.9 billion in fiscal year 2012. Anticipated receipts for the enacted fiscal year 2013 budget are $22.0 billion. Approximately $17.0 billion, or 64.3 percent of total federal revenue to the Commonwealth for fiscal year 2011, was attributable to public health and welfare programs, the largest of which are for the Medical Assistance and Temporary Assistance to Needy Families programs. In fiscal year 2012, $15.6 billion, or 68.4 percent of federal revenues, were attributable to these types of programs. In the fiscal year 2013 enacted budget, approximately $15.3 billion or 69.6 percent of federal revenues is attributable to public health and welfare programs.
Federal receipts have been influenced by the enactment of ARRA, with receipts of almost $3.1 billion in fiscal year 2011 for increased Medicaid reimbursement, flexible state stabilization funds and Education Jobs funds.
Major Commonwealth Expenditures
The Commonwealth’s major operating funds—the General Fund, the Motor License Fund and the State Lottery Fund—provide financial resources to operate programs and fund grants. Trends in expenditures from those funds for various program areas are discussed below based on budgetary basis financial statements for fiscal year 2011 and fiscal year 2012 and based on the enacted budget for fiscal year 2013.
Education
In fiscal year 2011, expenditures from Commonwealth revenues for education purposes were more than $10.9 billion. In fiscal year 2012, expenditures from Commonwealth revenues for education purposes were nearly $11 billion. The enacted budget for fiscal year 2013 includes over $11.3 billion in education funding, an increase of approximately 3.4 percent over fiscal year 2012.
Elementary and Secondary Education. The financing of public elementary and secondary education in Pennsylvania is shared by the Commonwealth and local school districts. There are 500 local school districts in the state. With certain exceptions, each is governed by a locally elected school board responsible for the administration of the public schools in the school district with the authority to levy taxes within the limits prescribed by the Public School Code of 1949, as amended. Funds supplied by the Commonwealth supplement the funds raised locally. Local school districts receive various subsidy payments for basic instruction, vocational education, debt service, pupil transportation, employee retirement programs including Social Security, and various special education programs. The largest such subsidy is the Basic Education subsidy. The enacted budget for fiscal year 2013 increased the state portion of the Basic Education subsidy by $49 million, or 0.9 percent, to more than $5.4 billion. For fiscal year
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2013, each school district will receive an amount equal to its 2011-12 Basic Education Funding allocation. The increase will be distributed for each qualifying school district, based on its local wealth and its existing tax burden. The funding formula also considers district size as well as student enrollment characteristics such as family poverty levels and English language learners. Fiscal year 2011 was the final year of available federal stimulus dollars for basic education funding.
Certain specialized education programs are operated and administered in Pennsylvania by 29 intermediate units established by the component local school districts. These intermediate units are funded from contributions from member school districts. Programs operated by intermediate units generally are special education programs for the gifted, for individuals with mental and physical disabilities, and for support of nonpublic schools through the provision of auxiliary services and the lending of instructional materials such as textbooks to children attending nonpublic schools in Pennsylvania.
Total Commonwealth expenditures for basic education programs in fiscal year 2011 were nearly $9 billion, representing 82.1 percent of all Commonwealth expenditures for education in fiscal year 2011. Total Commonwealth expenditures for basic education programs in fiscal year 2012 were more than $9.2 billion, representing 84.2 percent of all Commonwealth expenditures for education in fiscal year 2012. The enacted budget for fiscal year 2013 includes more than $9.6 billion for basic education programs.
Table 13
Fall Enrollment in Pennsylvania Public and Non-Public Elementary Schools and Secondary Schools
School Years 2008-2012 (In Thousands)
School Year Ended June
2008 2009 2010 2011 2012
Elementary Schools
Public ......................... 922 922 926 934 930
Nonpublic .................. 190 182 173 171 166
Secondary Schools
Public ......................... 880 863 852 845 833
Nonpublic .................. 76 74 73 79 76
Total
Public ......................... 1,802 1,785 1,778 1,779 1,763
Nonpublic .................. 266 256 246 250 242
Total ............................ 2,068 2,041 2,024 2,029 2,005
Source: Pennsylvania Department of Education.
Philadelphia School District. The Secretary of Education of the Commonwealth, under the provisions of the Pennsylvania Public School Code (the “School Code”), declared the Philadelphia School District as distressed effective December 22, 2001. During the period of distress covered by that declaration, all powers and duties of the Philadelphia School District Board of Education granted under the School Code or any other law are suspended and all such powers and duties are vested in a school reform commission. Currently, the school reform commission statutorily consists of five members, four appointed by the Governor and one appointed by the Mayor of the City of Philadelphia. The school reform commission’s objectives are to improve the levels of academic achievement and achieve financial stability within the school district. Termination of the declaration of distress by the Secretary of Education of the Commonwealth may be made only upon the recommendation of a majority of the members of the school reform commission. Upon termination of the declaration of distress, the Philadelphia School District Board of Education will resume the exercise of its powers. Beginning in fiscal year 2006-07, $25 million, which had been appropriated separately to the Philadelphia School District, has been incorporated into the Basic Education subsidy received by that district.
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Higher Education. Higher education in Pennsylvania is provided through 271 degree-granting institutions, which include the fourteen universities of the State System of Higher Education (PASSHE), four State-related universities, community colleges, independent colleges and universities and specialized degree-granting institutions. PASSHE, created in 1982 from the fourteen state-owned colleges, is administered by a Board of Governors whose members are appointed by the Governor and confirmed by the Senate. Nearly $2 billion in state and federal stimulus funds were expended by the Commonwealth in fiscal year 2011. In fiscal year 2012, $1.6 billion was expended by the Commonwealth for institution and student financial assistance. The enacted budget for fiscal year 2013 includes nearly $1.6 billion for higher education.
Table 14 Full-Time Equivalent Enrollment at State-Supported
Institutions of Higher Education School Years 2008-2012
(In Thousands)
School Year Ended June 2008 2009 2010 2011 2012
State System of Higher Education . 104 106 110 112 112
State-Related Universities ............. 147 153 156 158 158
Community Colleges ..................... 92 99 106 107 107 Total ......................................... 343 358 372 377 377
Source: Governor’s Executive Budget, various years.
Public Health and Human Services
The Commonwealth provides temporary support for its residents who are seeking to achieve and sustain independence. It also provides care, treatment and rehabilitation to persons with mental and physical disabilities and supports programs to prevent or reduce social, mental and physical disease and disabilities. In addition, it plans for and coordinates all the health resources within Pennsylvania. Services are provided directly through administration of programs and services, and indirectly through programs of standard setting, regulation, supervision, licensing, grants, subsidies and purchases of services.
Public health and human services expenditures were $29.5 billion in fiscal year 2011, $29.2 billion in fiscal year 2012 and are projected to be $30 billion in fiscal year 2013. With regard to fiscal year 2011 expenditures, $9.1 billion was funded from the General Fund, while $10.8 billion was funded from the General Fund for fiscal year 2012 and $10.9 billion is estimated to be provided from the General Fund for fiscal year 2013. Federal funds are expected to increase by $539 million, and augmentations are expected to increase by $42 million for fiscal year 2013. Public health and human service programs are the largest single component of combined state and federal spending in the Commonwealth’s operating budget. The overall budget increase reflects the impact of caseload increases, federal mandates, litigation and continued support of county operated programs for child welfare, mental health and intellectual disabilities.
The fiscal year 2013 enacted budget includes $337.4 million of receipts from the Tobacco Settlement Fund that will be expended for health care related programs. Federal funds matching the state Tobacco Master Settlement Agreement (MSA) funds are also provided. In addition, under the terms of the 1998 settlement that created the Tobacco Settlement Fund, payments by the tobacco companies may, in certain circumstances be reduced, reflecting decline in cigarette sales, and such payments also may be limited, delayed or terminated as a result of bankruptcy or insolvency of tobacco companies or legal challenges to the settlement or to amounts due thereunder. Since fiscal year 2007, receipts from the Tobacco MSA have been reduced as certain tobacco companies decided to withhold or to place into escrow over $4 billion in payments to the various states and localities under provisions of the Tobacco MSA. The Commonwealth’s share of withheld Tobacco MSA funds totals over $225 million. The Commonwealth
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has filed suit to recover the disputed payment funding withheld by tobacco companies. For fiscal year 2012, receipts from the April 2011 payment were reduced by $50.9 million and for fiscal year 2013, receipts from the April 2012 payment were reduced by $43 million.
Programs providing temporary financial assistance and medical assistance comprise the largest portion of public health and human services expenditures. General Fund expenditures for these assistance programs by the Commonwealth amounted to $5.1 billion in fiscal year 2011, $6.6 billion in fiscal year 2012 while $6.7 billion is budgeted from the General Fund for fiscal year 2013. A nursing home assessment fee provided a General Fund offset (meaning a reduction in required General Fund appropriations) of $229.6 million in fiscal year 2011, $215.4 million in fiscal year 2012 and is expected to provide a $188.7 million offset in fiscal year 2013. A Statewide managed care organization Gross Receipts Tax assessment provided a General Fund offset of $371.2 million in fiscal year 2011, $373.9 million in fiscal year 2012 and is expected to provide a $330.9 million offset in fiscal year 2013. In addition, a Statewide Quality Care Assessment provided a $120.9 million offset in fiscal year 2011, a $109 million offset in fiscal year 2012 and is expected to provide a $109 million offset in fiscal year 2013. For 2013 approximately 36 percent of the total cost of assistance to the economically needy will be supported by Commonwealth funds appropriated from the General Fund. The balance is provided from reimbursements by the federal government and through various program collection activities conducted by the Commonwealth.
Medical assistance continues to be a growing component of public health and human services expenditures. Despite implementation of Commonwealth initiatives to restrain costs, the program continues to grow due to an expanding caseload, technology improvements and general medical inflation. Expenditures for medical assistance increased during the period from fiscal years 2002 through 2012 by an average annual rate of 9.1 percent. Fiscal year 2011 expenditures from Commonwealth funds were $4.5 billion; in fiscal year 2012 expenditures from Commonwealth funds were $6.2 billion, an increase of 36.8 percent from the prior fiscal year primarily due to the loss of the enhanced federal match. Fiscal year 2013 expenditures from Commonwealth funds are projected to be $6.5 billion. Income maintenance cash assistance payments to families in transition to independence were $1.3 billion for fiscal year 2011, of which $459.8 million was from the General Fund. In fiscal year 2012, a total of $1.2 billion was provided, of which $377.4 million was from the General Fund. The enacted budget for fiscal year 2013 includes a total of $1.1 billion, with $217.4 million provided from the General Fund. Cash assistance is time-limited and requires participation in work activities to maintain eligibility. The 2013 enacted budget eliminates the cash assistance benefits provided through the General Assistance program. These benefits were funded exclusively with state funds.
Transportation
The Commonwealth is responsible for the construction, restoration and maintenance of the highways and bridges in the 40,000 mile state highway system, including certain city streets that are a part of the state highway system. Assistance for the maintenance and construction of local roads and bridges is provided to municipalities through grants of financial aid. Highway maintenance costs, construction costs and assistance grants are paid from the Motor License Fund. Other special funds, including the Public Transportation Assistance Fund, the Public Transportation Trust Fund and the State Lottery Fund provide funding for mass transit programs.
Act 44, enacted in 2007, provided the largest single-year increase in Commonwealth funding for transportation through a “public-public” partnership between the Pennsylvania Department of Transportation and the Pennsylvania Turnpike Commission which provided the Commonwealth with more funding for highways, bridges and transit. After fiscal year 2010, Act 44 funding decreased due to the Federal Highway Administration’s rejection of the Commonwealth’s applications seeking federal authorization to toll and operate Interstate 80. Beginning in fiscal year 2011, payments from the Turnpike Commission to the Commonwealth declined to $450 million annually, with $200 million going to highway and bridge projects and $250 million to mass transit projects. The reduction in payments represents a decrease of $300 million in annual expenditures for highway and bridge projects and a $150 million decrease in expenditures for mass transit from fiscal year 2010 levels. To address transportation funding in the Commonwealth, Governor Tom Corbett established the Governor’s Transportation Funding Advisory Commission (TFAC) on April 21, 2011. TFAC by proclamation was specifically created to develop a comprehensive, strategic proposal for addressing the transportation funding needs of Pennsylvania. In July 2011, the TFAC made funding recommendations which could bring in up to $2.7 billion annually in new
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highway and mass transit funding within five years of implementation. The governor is evaluating these proposals, which include uncapping the oil company franchise tax and adjusting vehicle and driver fees with inflation.
In addition to its unrestricted state funds, the Motor License Fund includes five restricted revenue accounts funded by state revenues legislatively dedicated to specific purposes. Some of the restricted purposes funded from these accounts also receive funding by annual appropriations of unrestricted Motor License Fund revenues. Programs receiving funds from a restricted account include highway bridges, highway construction and maintenance, grants to municipalities for highways and bridges, and airport development.
Total funding for the Commonwealth’s highway and bridge program for fiscal year 2011 was $1.950
billion. While funding increased to $2.125 billion in fiscal year 2012, a decrease to $2.006 billion is budgeted in fiscal year 2013.
Support of highway and bridge expenditures by local governments through grants paid from the Motor License Fund and restricted revenues were $382.2 million in fiscal year 2011 and $393.2 million in fiscal year 2012. In fiscal year 2013, grants to local governments will total $414.9 million.
In addition to its support of the highway system, the Commonwealth provides subsidies for mass transit systems including passenger rail and bus service.
In fiscal year 2008, the funding mechanisms for mass transit in the Commonwealth were changed with the enactment of Act 44. Mass transit funding was shifted from the General Fund to a combination of sources of revenue primarily going into a new Public Transportation Trust Fund established by the Act. The Public Transportation Trust Fund was created to provide a long-term, predictable and growing source of revenues for public transportation systems. A new, dedicated revenue stream consisting of 4.4 percent of the Pennsylvania Sales and Use Tax is earmarked for mass transit systems. The Public Transportation Trust Fund also receives revenues from the Public Transportation Assistance Fund, the Lottery Fund, and payments from the Pennsylvania Turnpike Commission. This funding supports mass transit programs statewide providing financial assistance for operating costs, capital costs, and certain administrative costs for the Department of Transportation. For fiscal year 2011, Commonwealth funding available for mass transit was $1.010 billion. Funding for mass transit increased in fiscal year 2012 to $1.046 billion. The fiscal year 2013 budget funding for mass transit will increase to $1.055 billion. The fiscal year 2013 total could increase with the realization of funding recommendations from TFAC.
The Commonwealth’s current aviation program funds the development of public airport facilities through grants providing for airport development, runway rehabilitation, and real estate tax rebates for public use airports. Taxes levied on aviation and jet fuel provide revenues for a restricted account for aviation programs in the Motor License Fund. In fiscal years 2011 and 2012, $7.25 million was expended from aviation restricted accounts each year for such purposes. A total of $7.25 million is again budgeted for the fiscal year 2013.
The Commonwealth is not responsible for the toll roads and bridges in Pennsylvania. These are under the jurisdiction of various authorities and commissions. See “GOVERNMENT AUTHORITIES AND OTHER ORGANIZATIONS.”
OUTSTANDING INDEBTEDNESS OF THE COMMONWEALTH
General
The Constitution permits the Commonwealth to incur the following types of debt: (i) debt to suppress insurrection or rehabilitate areas affected by disaster, (ii) electorate-approved debt, (iii) debt for capital projects subject to an aggregate debt limit of 1.75 times the annual average tax revenues of the preceding five fiscal years, and (iv) tax anticipation notes payable in the fiscal year of issuance. All debt except tax anticipation notes must be amortized in substantial and regular amounts. See Appendix E for the text of selected constitutional provisions relating to the finances of the Commonwealth.
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Debt service on Commonwealth general obligation debt is paid from appropriations out of the General Fund except for debt issued for highway purposes, which is paid from Motor License Fund appropriations.
Table 15 General Obligation Debt Outstanding(a)
Fiscal Years 2002-2012 (In Millions)
At June 30 General ObligationDebt Outstanding
2002 ............................ $6,059.3 2003 ............................ 6,767.2 2004 ............................ 6,892.6 2005 ............................ 6,747.4 2006 ............................ 7,287.0 2007 ............................ 7,834.0 2008 ............................ 8,177.0 2009 ............................ 8,653.7 2010 ........................... 2011 ............................ 2012 ...........................
9,891.7 9,872.1
10,724.3
________________________________________________________
(a) Net of sinking fund balances.
Net outstanding general obligation debt totaled $10,724.3 million at June 30, 2012, a net increase of $852.3 million from June 30, 2011. Over the 10-year period ended June 30, 2012, total net outstanding general obligation debt increased at an annual rate of 5.9 percent. Within the most recent 5-year period, outstanding general obligation debt has increased at an annual rate of 6.5 percent.
General obligation debt for non-highway purposes of $10,079.6 million was outstanding on June 30, 2012. Outstanding debt for these purposes increased by a net $754.9 million since June 30, 2011. For the period ended June 30, 2011, the 10-year and 5-year average annual compound growth rate for total outstanding debt for non-highway purposes has been 5.7 percent and 5.5 percent respectively. In its current debt financing plan, Commonwealth infrastructure investment projects include improvement and rehabilitation of existing capital facilities and construction of new facilities, such as public buildings, prisons and parks, transit facilities, economic development and community facilities, and environmental remediation projects.
Outstanding general obligation debt for highway purposes was $644.7 million on June 30, 2012, an increase of $97.4 million from June 30, 2011. Highway outstanding debt grew over the most recent 10-year and 5-year periods ended June 30, 2011, by the annual average rates of 8.6 percent and 41.8 percent respectively. A previous decline in outstanding highway debt was due to the policy begun in 1980 of funding highway capital projects with current revenues except for very limited exceptions. However, beginning with the enacted fiscal year 2009 budget, the Commonwealth initiated a multi-year plan to issue an average of $200 million in general obligation bonds annually to accelerate the rehabilitation of a portion of the Commonwealth’s 6,000 structurally deficient bridges. Funding to support the proposed debt issuance is being initially provided from an existing restricted account rather than from general revenues of the Motor License Fund or the General Fund. During the 2010 fiscal year, the Commonwealth issued $200 million in general obligation bonds in order to jumpstart its bridge rehabilitation program. During fiscal years 2011and 2012, the Commonwealth issued $130 million and $120 million respectively in general obligation debt for the bridge rehabilitation program and the fiscal year 2013 budget includes $85 million in such general obligation debt authority.
Table 16 shows selected debt ratios for the Commonwealth for fiscal year 2002 and for fiscal years 2008 through 2012. Table 16 contains corrections to certain prior fiscal year data as well as a revision in the methodology
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to account for debt service payments to include funding from all sources rather than debt service as paid from appropriations (resulting in some information in Table 16 being different from that appearing in previous Official Statements of the Commonwealth).
Table 16 Selected Debt Ratios
Fiscal Years 2002 and 2008 through 2012
Fiscal Year Ended June 30
2002 2008 2009 2010 2011 2012
Net Outstanding Debt (Millions)
General Obligation Debt(a)............................... 6,059$ 8,177$ 8,653$ 9,893$ 9,872$ 10,080$
Lease Payment Obligations(b)........................... 687 1,137 1,342 1,871 2,210 2,249
Total................................................................... 6,746$ 9,314$ 9,995$ 11,764$ 12,082$ 12,329$
% Increase (Decrease) over prior year............. 11.2% 7.4% 7.3% 17.7% 2.7% 2.0%
Population (Thousands) .................................. 12,326 12,566 12,604 12,717 12,742 12,742
Per Capita Debt................................................ 547$ 741$ 793$ 925$ 948$ 968$
Personal Income (Millions)................................ 382,251$ 512,992$ 499,700$ 516,390$ 541,297$ 541,297$
Debt as a % of Personal Income...................... 1.8% 1.8% 2.0% 2.3% 2.2% 2.3%
Debt Service (Millions)(c)
Highway Bonds(d)........................................... 84$ 30$ 26$ 36$ 46$ 51$
All Other Bonds............................................... 676 912 975 996 1,129 1,146
Lease Payments................................................ 70 58 74 92 127 137
Total............................................................... 830$ 1,000$ 1,075$ 1,124$ 1,302$ 1,334$
Increase (Decrease) Over Prior Year (0.1%) 8.0% 7.5% 4.6% 15.8% 2.5%Cash Revenues (Million)(e)
Motor License Fund......................................... 1,955$ 2,668$ 2,635$ 2,641$ 2,521$ 2,414$
General Fund.................................................... 20,059 27,928 25,529 27,648 27,497 27,678
Total............................................................... 22,014$ 30,596$ 28,164$ 30,289$ 30,018$ 30,092$
% Increase (Decrease) over prior year............ (2.2%) 2.9% (8.0%) 7.6% (0.9%) 0.3%
4.3% 1.1% 1.0% 1.4% 1.8% 2.1%
3.7% 3.5% 4.1% 3.9% 4.6% 4.6%
3.8% 3.3% 3.8% 3.7% 4.3% 4.4% License and General Fund Revenues.....................
% of General Fund Revenues...............................
Fund Revenues.......................................................
Highway Bond Debt Service as a % of Motor
All Other Bond Debt Service and Lease Payments
Total Debt Service and Lease Payments as a % of
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(a) Net of all sinking fund balances. Includes bond anticipation notes. (b) Includes unduplicated data of issues contained in Table 20. (c) As paid from appropriations, available funds and/or sinking fund balances. (d) Highway Bonds, interest portion of Advance Construction Bonds, Highway Public Improvement Bonds, State Highway and Bridge
Authority Bonds, General Authority Rentals, and Highway Bridge Improvement Bonds. (e) Commonwealth revenues only.
General Obligation Debt Outstanding
As of June 30, 2012, the Commonwealth had the following amount of general obligation debt outstanding:
[INTENTIONALLY LEFT BLANK]
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Table 17 General Obligation Debt Outstanding as of June 30, 2012
(In Thousands)
Debt Outstanding(b)
Less: Refunding Escrow(c)
Less: Sinking Fund(d)
Net Debt Outstanding
Capital Projects Debt:Capital Facilities Bonds................................................. 7,081,685$ (909,925)$ (34,068)$ 6,137,692$ Highway Bonds(e)......................................................... 630,835 - - 630,835 Refunding Bonds(e) ...................................................... 2,671,198 - - 2,671,198
Total Capital Projects Debt Outstanding................................ 10,383,718$ (909,925)$ (34,068)$ 9,439,725$
Electorate Approved Debt:PA Economic Revitalization Bonds............................... 490$ - - 490$ Land & Water Development Bonds............................... 245 - (108) 137 Nursing Home Loan Development Bonds...................... - - - - Volunteer Companies’ Loan Bonds................................ 80 - - 80 Vietnam Veterans Compensation Bonds........................ - - - - Water Facilit ies Restoration-1981 Referendum............. 1,790 - - 1,790 Pennvest—1988 Referendum Bonds.............................. 28,130 (7,380) (623) 20,127 Pennvest—1992 Referendum Bonds.............................. 114,630 (9,150) - 105,480 Agricultural Conservation Easement Bonds................... 650 - - 650 Local Criminal Justice Bonds......................................... 3,815 (400) (905) 2,510 Keystone Recreation, Parks & Conservation Bonds...... - - - - Growing Greener Bonds................................................. 464,460 (44,520) - 419,940 Water Supply and Wastewater Treatment Bonds.......... 183,570 (17,880) - 165,690 Persian Gulf Conflict Veterans....................................... 6,120 (760) - 5,360 Water and Sewer Assistance........................................... 339,490 - - 339,490
Total Electorate Approved Debt Outstanding......................... 1,143,470$ (80,090)$ (1,636)$ 1,061,744$
Other Bonded Debt:Disaster Relief Bonds..................................................... . . . . - - . . . . Refunding Bonds............................................................ 222,842 - - 222,842
Total Other Bonded Debt Outstanding.................................... 222,842$ . . . . - 222,842$
Total General Obligation Debt Outstanding............................ 11,750,030$ (990,015)$ (35,704)$ 10,724,311$
__________________________ (a) Reserved (b) Accreted value of capital appreciation bonds included. (c) Principal amount of bonds refunded to be paid from escrowed bond proceeds in State Treasurer escrow account. (d) Funds already deposited in sinking funds. (e) Refunding Bonds in the principal amount of $65.0 million have refunded prior bonds issued as Highway Bonds. Debt service on these Refunding Bonds remains payable from the Motor License Fund.
Debt service payable during each fiscal year on outstanding general obligation debt, net of refunding escrow amounts, as of June 30, 2012, for the years shown is as follows:
[INTENTIONALLY LEFT BLANK]
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Table 18 Bond Debt Service
(In Thousands)
Fiscal Year Ending June 30 Principal Interest Total
2013 ...................................... $767,395 $521,352 $1,288,747 2014 ...................................... 731,670 478,386 1,210,056 2015 ...................................... 680,355 443,642 1,123,997 2016 ...................................... 653,940 410,130 1,064,070 2017 ...................................... 630,645 378,563 1,009,208 2018 ...................................... 634,325 346,566 980,891 2019 ...................................... 641,290 314,083 955,373 2020 ...................................... 623,925 282,903 906,828 2021 ...................................... 620,220 253,828 874,048 2022 ...................................... 616,230 226,222 842,452 2023 ...................................... 579,080 198,223 777,303 2024 ...................................... 571,400 170,983 742,383 2025 ...................................... 535,835 143,769 679,604 2026 ...................................... 546,710 117,769 664,479 2027 ...................................... 510,435 91,063 601,498 2028 ...................................... 450,745 65,737 516,482 2029 ...................................... 370,765 44,606 415,371 2030 ...................................... 304,810 26,051 330,861 2031 ...................................... 168,145 10,336 178,481 2032 ...................................... 122,095 3,887 125,982
Grand Total ................................... $ 10,760,015 $ 4,528,099 $15,288,114
________________________________ Totals may not add due to rounding.
Nature of Commonwealth Debt
Capital Projects Debt. The Commonwealth may incur debt to fund capital projects for community colleges, highways, public improvements, transportation assistance, flood control, and redevelopment assistance. Before a project may be funded, it must be itemized in a capital budget bill adopted by the General Assembly. An annual capital budget bill states the maximum amount of debt for capital projects that may be incurred during the current fiscal year for projects authorized in the current or previous years’ capital budget bills. Capital projects debt is subject to a constitutional limit on debt.
Once capital projects debt has been authorized by the necessary legislation, issuance authority rests with at least two of the three Issuing Officials (the Governor, the State Treasurer and the Auditor General), one of whom must be the Governor.
Electorate-Approved Debt. The issuance of electorate-approved debt is subject to the enactment of legislation that places on the ballot the question of whether debt shall be incurred. The legislation authorizing the referendum must state the purposes for which the debt is to be authorized and, as a matter of practice, includes a maximum amount of funds to be borrowed. Upon electorate approval and enactment of legislation implementing the proposed debt-funded program, bonds may be issued. All such authorizing legislation to date has given issuance authority to at least two of the Issuing Officials, one of whom must be the Governor.
Other Bonded Debt. Debt issued to rehabilitate areas affected by disasters is authorized by specific legislation. Authorizing legislation has given issuance authority to two of the Issuing Officials, one of whom must be the Governor.
Tax Anticipation Notes. Due to the timing of major tax payment dates, the Commonwealth’s General Fund cash receipts are generally concentrated in the last four months of the fiscal year, from March through June. Disbursements are distributed more evenly throughout the fiscal year. As a result, operating cash shortages can occur during certain months of the fiscal year. When necessary, the Commonwealth engages in short-term borrowing to fund expenses within the fiscal year through the sale of tax anticipation notes. The authority to issue such notes rests with the Issuing Officials.
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The Commonwealth may issue tax anticipation notes only for the account of the General Fund or the Motor License Fund or both such funds. The principal amount issued, when added to already outstanding amounts, may not exceed in the aggregate 20 percent of the revenues estimated to accrue to the appropriate fund or funds in the fiscal year.
Tax anticipation notes must mature within the fiscal year in which they are issued. The Commonwealth is not permitted to fund deficits between fiscal years with any form of debt. Any year-end deficit balances must be funded in the succeeding fiscal year budget.
Currently, the Commonwealth has no tax anticipation notes outstanding and based on current projections it does not appear that the Commonwealth will issue any tax anticipation notes during fiscal year 2013. The Commonwealth will continue to actively monitor its daily operating liquidity to determine if any tax anticipation notes are required during the later part of fiscal year 2013. In fiscal year 2011, the Commonwealth issued $1,000 million in tax anticipation notes and in fiscal year 2010, the Commonwealth issued $800 million in tax anticipation notes. In each instance, the Commonwealth paid the outstanding balance in full on June 30th of the respective fiscal year in which the tax notes were issued. In the preceding eleven fiscal years, the Commonwealth did not issue any tax anticipation notes.
Bond Anticipation Notes. Pending the issuance of bonds, the Commonwealth may issue bond anticipation notes subject to the same statutory and constitutional limitations generally imposed on bonds. The term of such borrowings may not exceed three years. Issuing authority rests with the Issuing Officials. No bond anticipation notes are outstanding.
Projected Issuance of Long-Term Debt
Table 19, on the next page, shows projected future issuance of new-money bonds (or bond anticipation notes) through fiscal year 2017 as currently estimated, based on current authorizations. Included in Table 19 are bonds expected to be issued under three bond referenda proposed by the Governor and enacted by the General Assembly in 2004, 2005 and 2008. Not included however, are bonds authorized under the economic stimulus program of the Commonwealth Financing Authority. Actual issuance of bonds will be affected by a number of economic and other factors and may vary significantly from the Table 19 projection.
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Table 19 Projected Bond Issuance and Principal Retirements
Fiscal Years 2013-2017(a) (In Millions)
Fiscal Year Ending June 30
2013 2014 2015 2016 2017
Capital Facilities(b) Buildings and Structures ............................................. $ 995 $ 825 $ 800 $ 845 $ 660 Furniture and Equipment ............................................ 40 50 2 1 0 Transportation Assistance ........................................... 210 175 175 175 175 Redevelopment Assistance ......................................... 345 315 280 225 190 Flood Control ............................................................. 0 20 33 55 55 Bridge Projects ........................................................... 85 0 0 0 0 Special Purpose: Pennvest — 1988, 1992 & 2008 Referenda ................ 111 50 0 0 0 Local Criminal Justice ................................................ 0 0 0 0 0 Disaster Relief ............................................................ 0 0 0 0 0 Water Facilities Loan—1981 Referendum ................. 0 0 0 0 0 Water and Wastewater Referendum(a) ........................ 25 14 0 0 0 Persian Gulf Conflict Veterans Comp. Ref.(a) ............. 0 0 0 0 0 Growing Greener II Referendum(a) ............................. 37 37 37 0 0
Total Projected Issuance ................................. $ 1,848 $ 1,486 $ 1,327 $ 1,301 $ 1,080
Principal Retirement(c) .................................................... $ 853.0 $ 950.2 $ 997.9 $ 1,068 $1,125.2
________________________ Totals may not add due to rounding. (a) As provided in the fiscal year 2013 enacted budget. (b) Includes issuance for new projects and for projects previously authorized. (c) On bonded debt outstanding and pro forma for projected.
OTHER STATE-RELATED OBLIGATIONS
Moral Obligations
Moral obligation financing is a financing arrangement in which designated officials of the Commonwealth, its departments or agencies agree, when necessary, to request the General Assembly to appropriate funds as may be required to make up any deficiency in a debt service reserve fund established to assure payment of obligations issued under such an arrangement. The General Assembly is not required to approve such appropriation requests.
Pennsylvania Housing Finance Agency (“PHFA”). The PHFA is a state-created agency that provides financing for housing for lower and moderate income families in the Commonwealth. The bonds, but not the notes, of the PHFA are partially secured by a capital reserve fund required to be maintained by the PHFA in an amount equal to the maximum annual debt service on its outstanding bonds in any succeeding calendar year. If there is a potential deficiency in the capital reserve fund or if funds are necessary to avoid default on interest, principal or sinking fund payments on bonds or notes of PHFA, the statute creating PHFA provides a mechanism for obtaining additional funds. That mechanism directs the Governor, upon notification from PHFA, to place in the budget of the Commonwealth for the next succeeding year an amount sufficient to make up any such deficiency or to avoid any such default. The budget as finally adopted by the General Assembly may or may not include the amount so placed therein by the Governor. PHFA is not permitted to borrow additional funds so long as any deficiency exists in the capital reserve fund. No deficiency exists currently.
According to PHFA, as of June 30, 2012, PHFA had $4,118.2 million of revenue bonds outstanding.
Lease Financing
The Commonwealth, through several of its departments and agencies, leases various real property and equipment. Some leases and the lease payments thereunder are, with the Commonwealth’s approval, pledged as security for debt obligations issued by certain public authorities or other entities within the state. All lease payments payable by Commonwealth departments and agencies are subject to and dependent upon an annual spending
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authorization approved through the Commonwealth’s annual budget process. The Commonwealth is not required by law to appropriate or otherwise provide moneys from which the lease payments are to be paid. The obligations to be paid from such lease payments are not bonded debt of the Commonwealth.
Table 20 contains summary information on material obligations secured by lease payments of Commonwealth departments and agencies payable from the General Fund or other budgeted special funds.
Table 20 Obligations Secured By Commonwealth
Lease Payments (In Thousands)
Lessor Purpose
Maximum Annual Lease
Payment
Principal Amount
Outstanding as of
6/30/2012 Final Maturity
Harristown Development Corporation Office Space $ 6,301 $ 28,900 May 1, 2025
Philadelphia Regional Port Authority Port Facilities 4,601 31,700 Sept. 1, 2020
Sports & Exhibition Authority of Pittsburgh and Allegheny County
Public Auditorium
19,100 310,240 Nov. 1, 2039
CAFCO-PA Leasing I, LLC Prison Facilities 3,770 10,780 Dec. 1, 2015
NORESCO, LLC Equipment 2,158 15,580
Oct. 1, 2026
NORESCO, LLC Equipment 1,559 12,385
Oct. 1, 2026
NORESCO/Johnson Controls Equipment 8,416 84,295 Apr. 1, 2027
Pennsylvania Economic Development Finance Authority
Convention Center
26,641 266,730 Jun. 15, 2039
Pennsylvania Economic Development Finance Authority
Office Space 18,123 107,360 Mar. 1, 2034
________________________
The Harristown Development Corporation leases office space to the Commonwealth in the city of Harrisburg. Certificates of participation in the principal amount of $71,135,000 were issued in October 2001, representing undivided rights in the lease payments by the Commonwealth to the Harristown Development Corporation for nearly one million square feet of office space occupied by Commonwealth departments and agencies since 1978.
The Commonwealth has also leased port facilities of the Philadelphia Regional Port Authority (“PRPA”) to encourage trade through the Port of Philadelphia. Lease revenue bonds of PRPA in the amount of $53.9 million were issued by that authority in August 2003 to refund all outstanding PRPA Series 1993 Bonds. Lease revenue bonds of PRPA in the amount of $41.9 million were issued by that authority in September 2008 to refund the outstanding PRPA Series 2003 Bonds. These bonds are payable from lease payments made by the Commonwealth from an annual appropriation authorizing payments to PRPA.
In 2009, the Commonwealth executed an annually renewable lease purchase agreement with CAFCO-PA Leasing I, LLC, a Colorado limited liability company to assist the Commonwealth, acting through its Department of Correction, to acquire certain modular prison dormitory facilities. Certificates of participation in the amount of $19,300,000 were issued in December 2009. The certificates of participation are payable from lease payments made by the Commonwealth from an annual appropriation to its Department of Corrections.
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In 2010, the Commonwealth executed an installment purchase agreement with Noresco, LLC, a Massachusetts limited liability company. The purpose of the installment purchase agreement is to assist the Commonwealth, acting through its Department of Public Welfare, to acquire certain energy-savings improvements at its Ebensburg facility. Certificates of participation in the amount of $15,580,000 were issued in March 2010 and are payable from lease payments made by the Commonwealth from an annual appropriation to its Department of Public Welfare. The Commonwealth has also issued additional installment purchase agreements with Noresco and Johnson Controls. Certificates of participation in the amount of $86,850,000 were issued in October 2010 and are payable by the Commonwealth from annual appropriations to its Departments of General Services, Corrections and Public Welfare. Certificates of participation in the amount of $12,385,000 were issued in December 2010 and are payable by the Commonwealth from annual appropriations to its Departments of General Services and Public Welfare. The purpose of the additional installment purchase agreements was to assist the Commonwealth, acting through various departments, to acquire certain energy-savings improvements.
On March 1, 2009, the Commonwealth entered into a 25 year master lease agreement for certain office space within the Forum Place complex in the city of Harrisburg. The master lease covered 375,000 square feet of office space and had a term through February 28, 2034. In January 2012, PEDFA (defined below) issued lease revenue bonds in the principal amount of $107,360,000 to acquire the Forum Place complex from the then-controlling majority holder of the Defaulted 1998 Dauphin County General Authority bonds. Contemporaneous with the issuance of the PEDFA bonds to acquire the Forum Place, the Capital Region Economic Development Corporation (CREDC) entered into an agreement with both the Commonwealth and PEDFA in which the Commonwealth leases approximately 375,000 square feet of office space and 500,000 square feet of parking space in the Forum Place complex from CREDC. The PEDFA bonds are payable from lease payments made by the Commonwealth to CREDC from an annual appropriation authorizing payments to various Commonwealth agencies occupying the leased space.
Lease for Pittsburgh Penguins Arena
In October 2007, the Commonwealth and the Sports and Exhibition Authority of Pittsburgh and Allegheny County (the “SEA”) entered into a lease agreement (the “Arena Lease”) that, while not creating indebtedness of the Commonwealth, creates a “subject to appropriation” obligation of the Commonwealth. The SEA, a joint public benefit authority, issued in October 2007 its $313.3 million Commonwealth Lease Revenue Bonds (the “Arena Bonds”) to finance a multi-purpose arena (the “Arena”), to serve as the home of the Pittsburgh Penguins (the “Penguins”), a hockey team in the National Hockey League. The Arena Bonds are not debt of the Commonwealth but are limited obligations of the SEA payable solely from the Special Revenues pledged therefor. These Special Revenues include annually (1) $4.1 million from a lease with the Penguins, (2) not less than $7.5 million from the operator of a casino located in the City of Pittsburgh, and (3) $7.5 million from the Commonwealth’s Economic Development and Tourism Fund (the “Development and Tourism Fund”). The Development and Tourism Fund is funded with an assessment of five percent of the gross terminal revenue of all total wagers received by all slot machines in the Commonwealth less cash payments.
While the Special Revenues currently are projected to be adequate to pay all debt service on the Arena Bonds, to the extent such revenues are in any year inadequate to cover debt service, the Commonwealth is obligated under the Arena Lease to fund such deficiency, subject in all cases to appropriation by the General Assembly. The maximum annual amount payable by the Commonwealth under the Arena Lease is $19.1 million. In December 2009, the Commonwealth was notified by the SEA that an additional $2.8 million would be required in fiscal year 2010 to support debt service. In compliance with its obligations under the Arena Lease, the Commonwealth included an appropriation request for $2.8 million from the Pennsylvania Gaming and Economic Development Tourism Fund in its fiscal year 2010 budget. Subsequent to the fiscal year 2010 budget, the Commonwealth as been annually notified by the SEA that additional funds would be required to support debt service. In each subsequent year, the Commonwealth included the appropriation request in the appropriate fiscal year budget. In fiscal year 2011, the actual amount appropriated to support the SEA debt service was $163,885.00 and in fiscal year 2012 it was $96,470.00.
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During April 2010, the SEA issued $17.36 million in additional Commonwealth Lease Revenue Bonds (the “Supplemental Arena Bonds”) to complete the Arena. The Supplemental Arena Bonds do not constitute debt of the Commonwealth but are limited obligations of the SEA payable solely from the Special Revenues pledged therefor. As with the Arena Bonds, the Commonwealth is obligated under the Arena Lease, as amended, to fund any deficiency in Special Revenues necessary to pay debt service on the Supplemental Arena Bonds, subject in all cases to appropriation by the General Assembly.
Pennsylvania Convention Center
In April 2010, the Commonwealth acquired (through ownership and a long-term leasehold interest) the Pennsylvania Convention Center located in Philadelphia, Pennsylvania and the expansion thereto that was recently constructed. Such acquisition was financed through the issuance by PEDFA (defined below) of $281.075 million of revenue bonds (the “Convention Center Bonds”). The Commonwealth, the City of Philadelphia (the “City”) and the Pennsylvania Convention Center Authority (the “Convention Center Authority”) entered into an Operating Agreement (the “Operating Agreement”) in connection with the issuance of the Convention Center Bonds and the acquisition of the Pennsylvania Convention Center which provides for the operation of the Pennsylvania Convention Center by the Convention Center Authority (which also leases the facility), for the City to make an annual payment of $15 million plus a percentage of its Hotel Room Rental Tax and Hospitality Promotion Tax revenues to support operations of the Pennsylvania Convention Center and for the Commonwealth to make payments to finance operating deficits and operating and capital reserve deposits of the Pennsylvania Convention Center and to pay debt service on the Convention Center Bonds. The Commonwealth also entered into a Grant Agreement (the “Grant Agreement”) with PEDFA and U.S. Bank National Association, as trustee for the Convention Center Bonds, with respect to the obligations of the Commonwealth to make the payments required under the Operating Agreement and related amounts due with respect to the Pennsylvania Convention Center and the Convention Center Bonds.
The obligations of the Commonwealth under the Operating Agreement and the Grant Agreement do not create indebtedness of the Commonwealth but are payable from (1) funds available in the Gaming Economic Development and Tourism Fund and (2) other funds of the Commonwealth, subject to annual appropriation by the state legislature. Payments from the Gaming Economic Development and Tourism Fund of up to $64,000,000 per year for up to 30 years (but not exceeding $880 million in the aggregate) have been appropriated by the General Assembly (by Act 53 of 2007, (“Act 53”)) for the payment of debt issued with regard to the Pennsylvania Convention Center and for operating expenses of the Pennsylvania Convention Center; however, there is no requirement in Act 53 or otherwise that funds in the Gaming Economic Development and Tourism Fund be so applied. Moneys in the Gaming Economic Development and Tourism Fund have also been appropriated by the General Assembly to a number of other projects and could be appropriated to additional projects in the future. The Gaming Economic Development and Tourism Fund is funded with an assessment of five percent of the gross terminal revenue of all total wagers received by all slot machines in the Commonwealth less cash payments. While the Gaming Economic Development and Tourism Fund is projected to continue to have sufficient revenues to pay its current appropriated obligations, there can be no absolute assurance that the Gaming Economic Development and Tourism Fund in any future fiscal year will receive sufficient receipts to pay its appropriated obligations.
Any payments due from the Commonwealth under the Operating Agreement and the Grant Agreement and which are not paid from the Gaming Economic Development and Tourism Fund are subject to annual appropriation by the General Assembly. The Commonwealth currently projects that payments materially in excess of the aggregate $880 million appropriated from the Gaming Economic Development and Tourism Fund will be required to be paid by it to satisfy the Commonwealth’s obligations under the Operating Agreement and the Grant Agreement over the terms of such agreements.
Commonwealth Financing Authority
The Commonwealth Financing Authority (the “CFA”), a major component of the Governor’s Economic Stimulus Proposals for the Commonwealth, was established in April 2004 with the enactment of legislation establishing the CFA as an independent authority and an instrumentality of the Commonwealth. The CFA is authorized to issue limited obligation revenue bonds and other types of limited obligation revenue financing for the
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purposes of promoting the health, safety, employment, business opportunities, economic activity and general welfare of the Commonwealth and its citizens through loans, grants, guarantees, leases, lines and letters of credit and other financing arrangements to benefit both for-profit and non-profit entities. The CFA’s bonds and financings are to be secured by revenues and accounts of the CFA, including funds appropriated to CFA from general revenues of the Commonwealth for repayment of CFA obligations. The obligations of the CFA do not constitute a debt or liability of the Commonwealth.
Since November 2005, the CFA has completed multiple bond issues to fund programs established by its original economic stimulus mission of April 2004.
As part of the enactment process for the fiscal year 2009 budget, the General Assembly enacted and on July 9, 2008, the Governor signed into law Act 63 of 2008 (“Act 63”) and Act 1 of Special Session 1 of 2008 (“Act 1”). Combined, these two acts provide the CFA with additional bond issuance authority of up to an additional $1,300 million. Act 63 of 2008 provides the CFA with authority to issue up to $800 million in limited obligation revenue bonds in order to fund water or sewer projects, storm water projects, flood control projects and high hazard unsafe dam projects. Act 63 also provides for the use of Pennsylvania Gaming and Economic Development and Tourism Fund revenues to support debt service costs associated with the $800 million in additional CFA debt authority. Act 1 provides the CFA with authority to issue up to $500 million in limited obligation revenue bonds to fund the development of alternative sources of energy. As of December 31, 2012, the CFA had issued $242.0 million in limited obligation revenue bonds authorized by Act 1. Further, the CFA has issued $550.0 million in limited obligation revenue bonds authorized by Act 63.
As of June 30, 2012, the CFA had $1,380.6 million in outstanding bond debt. With respect thereto, the Commonwealth’s General Fund has appropriation responsibility for $701.2 million thereof and the Pennsylvania Gaming and Economic Development and Tourism Fund has appropriation responsibility with respect to $679.4 million of such outstanding debt. In preparation for the enactment of the fiscal year 2011 Commonwealth budget, DCED and the Office of the Budget, in compliance with the various Service Agreements, requested an appropriation from the Pennsylvania General Assembly in the full amount of the then estimated debt service for the CFA. In light of available resources of the CFA, the Pennsylvania General Assembly enacted its fiscal year 2011 budget which appropriated $76.480 million in state funds to the CFA for payment of CFA debt service during fiscal year 2011, which amount was approximately $3.5 million less than required to meet all of the CFA’s debt service obligations in that fiscal year. In order to address this shortfall, the CFA applied approximately $3.5 million in available interest earnings to its debt service payments. The Commonwealth’s fiscal year 2012 enacted budget appropriated $82.019 million, which amount was sufficient for the CFA to meet all of its debt service obligations. The Commonwealth’s fiscal year 2013 enacted budget appropriates $85.519 million in state funds to the CFA for payment of CFA debt service during fiscal year 2013. CFA debt service for fiscal year 2013 is estimated to be $82.012 million. With respect to future fiscal year budgets, additional appropriations from the General Fund for future debt service are expected to be requested each year by the Department of Community and Economic Development for inclusion in future Executive Budget requests to the General Assembly.
Pensions and Retirement Systems
General Information
The Commonwealth maintains contributory benefit pension plans covering all state employees, public school employees and employees of certain state-related organizations. State employees and employees of certain state-related organizations are members of the State Employees’ Retirement System (“SERS”). Public school employees are members of the Public School Employees’ Retirement System (“PSERS”). With certain exceptions, membership in the applicable retirement system is mandatory for covered employees.
SERS and PSERS are established by state law as independent administrative boards of the Commonwealth, each directed by a governing board that exercises control and management of its system, including the investment of its assets. The board of the SERS consists of eleven members, six appointed by the Governor, two members each from the Senate and House of Representatives and the State Treasurer. The PSERS board has fifteen members, including the Commonwealth’s Secretary of Education, the State Treasurer, the executive secretary of the Pennsylvania School Boards Association, two members appointed by the Governor, six elected members (five from
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among PSERS members and one from among school board members in Pennsylvania) and two members each from the Senate and the House of Representatives.
The retirement plans of SERS and PSERS are contributory defined benefit plans for which the benefit payments to members and contribution rates by employees are specified in state law. Changes in benefit and contribution provisions for each retirement plan must be made by legislation enacted by the General Assembly. Under statutory provisions established in 1981, all legislative bills and amendments proposing to change a public employee pension or retirement plan are to be accompanied with an actuarial note prepared by an enrolled pension actuary providing an estimate of the cost and actuarial effect of the proposed change.
The Commonwealth’s retirement programs are funded by contributions from both the employer and employee. The contribution rate for new PSERS members who enrolled in the pension plan on or after January 1, 2002 and before July 1, 2011 is 7.5 percent of compensation. The contribution rate for new PSERS members who enroll on or after July 1, 2011 is 7.5% or 10.3% depending upon elections made by each employee member. The contribution rates for PSERS members who enrolled prior to January 1, 2002 range from 5 percent to 7.5 percent of compensation, depending upon the date of commencement of employment and elections made by each employee member. The SERS’ employee contribution rate is 6.25 percent for a majority of member employees. Interest on each employee’s accumulated contributions is credited annually at a 4 percent rate mandated by state statute. Accumulated contributions plus interest credited are refundable to covered employees upon termination of their employment for most members hired before December 31, 2010, for SERS and before June 30, 2011, for PSERS.
Act 120 of 2010 and Commonwealth Contributions
On November 23, 2010, the Governor signed Act 120 of 2010 into law (“Act 120”) to implement changes to the actuarial methodologies of both of the PSERS and the SERS pension plans. Act 120 also implemented employer contribution collars, set a permanent minimum employer contribution rate, changed the retirement benefits for new employees and prohibited the use by the Commonwealth of pension obligation bonds, among other changes.
The most significant change to the Commonwealth benefit pension systems from Act 120 is the enactment of employer contribution collars to reduce the previously anticipated major increases in pension contributions which would have been required of the Commonwealth beginning in fiscal year 2013. Contribution collars are limits on the amount of year-over-year increase that are required from the employer, namely the Commonwealth, plus in the case of PSERS, the Commonwealth school districts. Contribution collars are expressed as a percentage of payroll and under Act 120, the contribution collars is 3 percent in fiscal year 2012, 3.5 percent in fiscal year 2013 and 4.5 percent in fiscal year 2014 and all future years beyond 2014 until the actuarial calculated rate is below the collared rate. To the extent the pension funds have large unfunded liabilities, as is presently the case, such capping of required employer contributions to the pension funds is likely to materially extend the period over which such unfunded liability is funded. Act 120 proposes to amortize certain PSERS unfunded liability over 24 years and certain SERS unfunded liability over 30 years.
Act 120 amended PSERS’ actuarial cost method effective with the June 30, 2010 actuarial valuation and amended the benefit structure for new members on or after July 1, 2011. The key benefit reductions included the following: lowered the benefit accrual rate from 2.5 percent of final average salary for each year of service to 2 percent; increased the vesting period from 5 years to 10 years; eliminated the option for members to withdraw their contributions and interest; increased the normal retirement age; and implemented a shared risk provision that could raise or lower member contribution rates when annual returns over a multi-year period are higher or lower than the investment rate of return assumed for PSERS’ actuarial valuations. Key funding provision changes are the re-amortizing of existing liabilities and future experience gains and losses over 24 years with level percent of pay, changing asset smoothing from five to ten years and the implementation of employer contribution rate collars as described above. Once the actuarial calculated rate is below the collared rate, the collars will disappear and the pension rate floor will be the actuarial normal cost.
With respect to SERS, Act 120 amended the benefit structure for most of SERS future employees hired after December 31, 2010 and amended the funding provisions. The key benefit reductions include the following: lowered the benefit accrual rate from 2.5 percent of final average salary for each year of service to 2 percent for most employees; increased the vesting period from 5 years to 10 years; eliminated the option for members to
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withdraw their contributions and interest; increased the normal retirement age; and implemented a shared risk provision that could raise or lower member contribution rates when annual returns over a multi-year period are higher or lower than the interest rate of return assumed for SERS’ actuarial valuations. Key funding provision changes are the re-amortizing of existing liabilities and future experience gains and losses over 30 years with level dollar payments, and the implementation of employer contribution rate collars as described above. Once the actuarial calculated rate is below the collared rate, the collars will disappear.
The SERS composite Commonwealth contribution rate was 4.04 percent in fiscal years 2008 and 2009, and 4.01 percent in fiscal year 2010. For fiscal year 2011, the General Assembly passed Act 2010-46, effectively setting the composite Commonwealth contribution rate at 1 percent greater than the previous fiscal year. The Commonwealth contribution rate was 5.01 percent for fiscal year 2011. If the General Assembly had not enacted Act 2010-46, the required Commonwealth contribution would have been 5.65 percent for fiscal year 2011. The composite rate for fiscal year 2012 was 8.01 percent and for fiscal year 2013 the composite rate is 11.59 percent.
For PSERS, the employer’s contribution is shared by the Commonwealth and the school districts. The Commonwealth remits its employer contribution portion to the school districts, which then remit the entire employer contributions (both school district and Commonwealth portions) to PSERS. The Commonwealth’s contribution is appropriated annually from the General Fund to the Department of Education. PSERS’ employer rate was 6.46 percent in fiscal year 2007, 7.13 percent in fiscal year 2008, 4.76 percent in fiscal year 2009 and 4.78 percent in fiscal year 2010. For fiscal year 2011, the General Assembly passed Act 2010-46, effectively setting the employer contribution rate at 5.64 percent. If the General Assembly had not enacted Act 2010-46, the required employer contribution would have been 8.22 percent for fiscal year 2011. The composite rate for fiscal year 2012 was 8.65 percent.
In fiscal year 2008, the Commonwealth contributions were $237.5 million and $451.2 million respectively, constituting 8.4 and 18 percent increases in the year-over-year contribution to SERS and PSERS. During fiscal year 2009, Commonwealth contributions to SERS and PSERS were $242.5 million and $360.6 million, a 2.1 percent increase and a 20.1 percent reduction respectively in year-over-year contributions. During fiscal year 2010, Commonwealth contributions totaled $262.5 million for SERS, an 8.2 percent increase in year-over-year contributions, and for PSERS $342.6 million, a 5.0 percent decrease in the year-over-year contributions. For fiscal year 2011, for SERS, the Commonwealth contribution was $300.4 million, a 14.4 percent increase, and for PSERS, $408.6 million, a 19.3 percent increase. For fiscal year 2012, the SERS projected Commonwealth contributions were $501.4 million, a 66.9 percent increase and for PSERS, $600.1 million, a 47 percent increase.
Based on the 2009 valuations of the two retirement systems, Commonwealth contributions to both systems were projected to increase significantly in fiscal year 2012 based on pre-Act 120 provisions. Those increases have been lowered in the near-term as a result of Act 120, but will continue to significantly rise over the next decade. For fiscal year 2012, PSERS contribution rate is 8.65 percent under the provisions of Act 120 compared to a pre-Act 120 rate of 10.61 percent. Commonwealth contributions to PSERS in fiscal year 2012 are estimated to be $600.1 million compared to pre-Act 120 anticipated contributions of $823 million. For fiscal year 2013 the PSERS Board has certified a rate of 12.36% under the provisions of Act 120 compared to a pre-Act 120 rate of 29.65%. After 2013, employer rates are expected to rise to every year through FY 2015 by the percentage increases provided by the collars and would reach a maximum rate of 28.04 percent in FY 2020. After 2020 employer rates will decline slowly and will not drop below 20 percent until FY 2036.
With respect to SERS, Commonwealth contributions are expected to rise to $682.7 million or 11.6 percent of payroll in fiscal year 2013 compared to anticipated contributions of $1,559.9 or 26.5 percent of payroll without collar restrictions. For fiscal year 2014, the Commonwealth contribution rate is now projected to be 16.0 percent as compared to 30.1 percent without collar restrictions. After 2013, the Commonwealth rates are expected to rise every year through fiscal year 2018 by the percentage increases as provided for in the collars and would reach a maximum rate of 32.5 percent in fiscal year 2018. After 2018, Commonwealth rates will decline slowly and not drop below 20 percent until fiscal year 2041.
The General Assembly could again enact amendatory legislation which, among other results, could cause the Commonwealth contribution rates to be materially lower than the projected rates discussed in the above paragraphs.
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Investment Performance
In common with many other public pension systems in the United States, the recent global economic crisis and resulting recession have had dramatic negative impacts on PSERS’ and SERS’ investment performance. For fiscal year 2009, PSERS generated a negative 26.54 percent annual return. SERS’ return on investments for calendar year 2008 was negative 28.7 percent. Calendar year 2009 and 2010 reflected improvement in SERS’ investment performance with a 9.1 percent and 11.9 percent return on investments respectively. For 2011, SERS returned 2.7 percent. Similarly, PSERS’ fiscal years 2010 and 2011 investment performance reflected an improvement from fiscal year 2009 with a rate of return of 14.59 percent and 20.37 percent, respectively.
Plan Assets
Contributions to the PSERS and SERS pension plans by the Commonwealth including medical premium assistance payments, employee contributions, interest earnings and benefit payments are shown in the following tables, which have been prepared by the respective staffs of PSERS and SERS.
Table 21
Public School Employees Retirement Fund (In Millions)
Year Ended June 30
Employer Contributions
Employee Contributions
Net Investment Income (Loss)
Total Deductions From Plan Net Assets(a)
Net Assets(b)
2006 ..................... $ 531 $ 983 $ 7,943 $ 4,164 $ 57,417 2007 ..................... 746 1,000 12,703 4,371 67,523 2008 ..................... 835 1,039 (1,776) 4,991 62,659 2009 ..................... 608 1,090 (16,198) 4,983 43,207 2010 ..................... 638 1,143 6,115 5,300 45,837 2011 ..................... 748 1,243 9,247 5,675 51,433 ___________________________ (a) Includes PSERS administrative expenses. (b) PSERS adopted GASB Statement Nos. 25 and 26 retroactively to fiscal 1994. GASB Statement No. 25 requires the presentation of Plan Net
Assets, which combines the cumulative residual effects of all System assets and current liabilities. System long-term actuarial liabilities are not presented on the System’s basic financial statements, but instead are presented upon a supplementary schedule of funding progress. The presentations above include the effects of financial activity related to the administration of the PSERS healthcare insurance premium assistance program and Health Options Program. As required with the adoption of GASB Statement No. 26, separate financial presentations for these programs are made in PSERS financial statements. PSERS also adopted GASB Statement No. 34 for the fiscal year beginning July 1, 2001 that requires the presentation of Management’s Discussion and Analysis as required supplementary information preceding the financial statement.
Table 22 State Employees’ Retirement Fund
(In Millions)
Year Ended December 31
Employer Contributions
Employee Contributions
Net Investment Income(a)
Total Deductions From Plan Net Assets(b)
Plan Net Assets(c)
2006 ..................... $196 $318 $4,730 $1,943 $32,053 2007 ..................... 244 334 5,247 2,361 35,516 2008 ..................... 235 337 (11,061) 2,231 22,796 2009 ..................... 253 349 3,561 2,297 24,662 2010 ..................... 273 349 3,076 2,474 25,886 2011 ..................... 392 351 480 2,732 24,377 ___________________________ (a) Includes net appreciation (depreciation) in fair value of investments. (b) Includes SERS administrative costs. (c) Market value of investment assets. SERS adopted GASB Statement No. 25 which requires that investments be reported at their fair value. Also
includes securities lending collateral pool pursuant to GASB Statement No. 28. In 2002, SERS adopted GASB Statement No. 34, which requires the presentation of Management Discussion and Analysis as required supplementary information preceding the financial statements.
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Actuarial Calculations and Unfunded Actuarial Accrued Liability
Annual actuarial valuations are required by state law to determine the employer contribution rates necessary to accumulate sufficient assets and provide for payment of future benefits. Actuarial assessments are “forward-looking” information that reflect the judgment of the fiduciaries of the pension plans, and are based upon a variety of assumptions, one or more of which may prove to be inaccurate or be changed in the future. Actuarial assessments will change with the future experience of the pension plans. The actuary’s recommendations for employer contribution rates represent a funding plan for meeting current and future retirement obligations. The employer’s contribution rate is computed to fully amortize the unfunded actuarial accrued liability of a plan as determined by the actuary. The unfunded accrued liability is a measure of the present value of benefits estimated to be due in the future for current employees under specified assumptions as to mortality, pay levels, retirement experience and employee turnover, less the present value of assets available to pay those benefits, under specified assumptions of normal cost, supplemental annuity amortization, employer contribution levels and employee contributions. The unfunded actuarial accrued liability for recent years with completed valuations is shown in Table 23 below for both SERS and PSERS.
The Boards of PSERS and SERS periodically review their respective system actuarial assumptions with actuaries, investment consultants and staff and determine whether to make any prospective changes to these assumptions. Both Boards have recently adopted changes to their respective system actuarial assumptions. In January 2009, the PSERS Board of Trustees decreased PSERS’ actuarial investment rate of return assumption from 8.5 percent to 8.25 percent, effective for the June 30, 2008 actuarial valuation, and further decreased the rate of return assumption from 8.25 percent to 8.0 percent for the June 30, 2009 valuation. In March 2011, the PSERS Board decreased the actuarial investment rate of return for a third time from 8.0 percent to 7.5 percent for the June 30, 2011 actuarial valuation based on a further reduction in the long term capital market rate of return assumptions of its investment consultant. In April 2009, the State Employees' Retirement Board decreased SERS’ assumed rate of return on investments from 8.5 percent to 8.0 percent effective for the December 31, 2008 valuation. In May 2012, SERS’ Board decreased the actuarial rate of return from 8.0 percent to 7.5 percent for the December 31, 2011 valuation. These changes to SERS’ investment return assumptions conform to the median assumption used by public pension funds nationally.
Table 23 Unfunded Actuarial Accrued Liability
2005-2010 (In Millions)
Valuation Year Ended In SERS(a) PSERS(b)
2005 .................................. $2,058 $10,007 2006 .................................. 2,216 12,163 2007 .................................. 914 9,438 2008 .................................. 2009 .................................. 2010 .................................. 2011 ..................................
3,801 5,592 9,736 14,664
9,924 15,739 19,699 26,499
________________________________________________________ (a) The fiscal year for SERS ends on December 31 of each year. (b) The fiscal year for PSERS ends on June 30 of each year.
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The net increase in the unfunded actuarial accrued liability is attributable to legislative pension plan modification to limit funding increases, to changes to the actuarial assumptions and to recent actual rates of return on pension fund investments being materially below the actuarially assumed rates.
For financial reporting purposes, both SERS and PSERS have adopted the Governmental Accounting Standards Board’s Statement No. 25. This Statement requires a specific method of accounting and financial reporting for defined benefit pension plans. Among other things, the Statement requires a comparison of employer contributions to “annual required contributions” (“ARC’). Independently audited financial statements for both SERS and PSERS, as of June 30, 2011 and December 31, 2011, respectively, provide this comparison for each of the fiscal years then ended as shown in the following tables. The SERS and PSERS audited financial statements and other data regarding the respective pension plan are available electronically at the following respective websites www.sers.state.pa.us and www.psers.state.pa.us
Table 24
Comparison of Employer Contributions to Annual Required Contributions (In Thousands)
Public School Employees Retirement Fund
Year Ended
June 30
Annual Required
Contributions
Actual Employer
Contributions
Percentages Contributed
2011..................... 2010.....................
$2,436,602 1,928,278
$646,560** 527,212**
27% 27
2009..................... 1,761,295 503,277** 29 2008..................... 1,852,238 753,532 41 2007..................... 1,708,821 659,545 39 2006..................... 2005..................... 2004.....................
1,328,373 945,107 321,091
456,878 431,556 321,091
34 46
100
State Employees’ Retirement Fund
Year Ended December 31
Annual Required
Contributions
Actual Employer
Contributions
Percentages Contributed
2011 .................... $913,778 $391,749 43% 2010 .................... 866,822 273,083 31 2009 .................... 643,861 253,250 39 2008 .................... 584,248 235,288 40 2007 .................... 617,253 243,936 39 2006 .................... 584,745 196,420 36 2005 .................... 319,190 148,375 46 2004 .................... 105,229 106,703 100
___________________________ (**) Net of purchase of service contributions
On July 8, 2011, the Governmental Accounting Standards Board (“GASB”) released its exposure draft of proposed changes in pension accounting and financial reporting standards for state and local governments (GASB 25 and 27), and if implemented, these changes will impact the accounting treatment of pension plans in which state and local governments participate. Major changes would be: 1) the inclusion of unfunded pension liabilities on the government’s balance sheet (such unfunded liabilities are currently typically included as notes to the government’s
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financial statements); 2) full pension costs would be shown as expenses regardless of actual contribution levels; 3) lower actuarial discount rates would be required to be used for most plans for certain purposes of the financial statements, resulting in increased liabilities and pension expenses; and 4) shorter amortization periods for unfunded liabilities would be required to be used for certain purposes of the financial statements, which generally would increase pension expenses. In connection with implementation of the foregoing, on June 25, 2012, GASB approved Statement 67 (Plans) which replaces requirements of Statement 25 (effective for fiscal years beginning after June 15, 2013) and Statement 68 (Employers) which replaces the requirements of Statement 27 (effective for fiscal years beginning after June 15, 2014).
Other Post-Employment Benefits
In addition to a defined benefit pension plan for state employees and employees of certain state-related organizations, the Commonwealth also provides health care plans for its eligible retirees and their qualifying dependents. These and similar plans are commonly referred to as “other post-employment benefits” or “OPEBs.” The Commonwealth provides OPEBs under two plans. The Retired Pennsylvania State Police Program (RPSPP) provides collectively bargained benefits to retired state enlisted members and their dependents. The Retired Employee Health Program (REHP) provides Commonwealth-determined benefits to other retired state employees and their dependents.
The General Assembly, based upon the Governor’s request, annually appropriates funds to meet the obligation to pay current retiree health care benefits on a “pay-as-you-go” basis. Retiree health care expenditures are currently funded by the Commonwealth’s General Fund (approximately 46 percent), and by Federal, Other and Special Funds. Commonwealth costs for such benefits totaled $563 million in fiscal year 2010, $626 million in fiscal year 2011 and $660 million in fiscal year 2012.
Summary of Commonwealth Actions to Control Retiree Health Care Costs
The following is a summary of key actions taken to date by the Commonwealth to contain the growth of the cost of health care/OPEB obligations for retirees:
1. REHP-eligible employees retiring after July 1, 2005 but prior to July 1, 2007 are required to annually pay 1 percent of their final annual gross salary as a contribution towards the cost of coverage.
2. REHP-eligible employees retiring on or after July 1, 2007 are required to annually pay an escalating percentage of their final annual gross salary as a contribution towards the cost of retiree health care coverage. The current contribution rate is 3 percent. Any future collectively bargained increases in the employee contribution rate for active employees will also automatically cover all retirees who retire on or after July 1, 2007.
3. REHP-eligible employees retiring after July 1, 2004 will have their post employment benefits changed automatically as the benefits for active employees are updated and changed.
4. Effective June 30, 2008, active employees who retire after age 60 must have at least 20 years of service to be REHP-eligible (prior to June 30, 2008, eligibility was attained with 15 years of service).
5. The Commonwealth has received the Medicare Part D drug subsidy for its retiree health care plans since June 2006.
6. The REHP Plan was redesigned for prescription drugs (three-tiered formulary and utilization management) and medical benefits (increased co-payments for specialist and emergency room visits). Changes were effective in February 2008 and May 2008.
7. Effective July 1, 2007, State Police retirees are eligible to enroll in PPO plans.
8. State Police enlisted members who retired on or after April 21, 2005 will have a two-tiered co-payment structure and those retiring on or after July 1, 2007 will have a three-tiered formulary for their prescription drug plan.
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9. Effective May 1, 2008, REHP Medicare supplemental coverage was replaced with a Medicare Private Fee-For-Service Plan. Effective January 1, 2010, this plan was eliminated and retirees enrolled in this plan had the option to enroll in a Medicare HMO or Medicare PPO.
Governmental Accounting Standards Board Statement #45
On June 21, 2004, the Governmental Accounting Standards Board (GASB) released its Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions (“Statement No. 45”). Statement No. 45 establishes standards for the measurement, recognition and display in the financial reports of state and local governments of obligations to pay OPEBs, when provided separately from a pension plan, expense or expenditures and related liabilities. Under Statement No. 45, governments are required to: (i) measure the costs of benefits, and recognize other post-employment benefits expenses, on the accrual basis of accounting during periods that employees are providing service; (ii) provide information about the actuarial liabilities of promised benefits associated with past service and whether, or to what extent, those benefits have been funded; and (iii) provide information useful in assessing potential demands on the employer’s future cash flows.
In fiscal year 2008, the Commonwealth’s Office of Budget entered into an Interagency Agreement with the independent Pennsylvania Department of Treasury to establish irrevocable trust equivalent arrangements (trust accounts) for the purpose of providing advance funding to both the REHP and RPSPP programs. The Commonwealth had previously established restricted receipt accounts for the REHP and RPSPP programs in order to accumulate funds to pay retiree health care costs on a “pay-as-you-go” basis while maintaining an adequate reserve balance.
In fiscal year 2008, $60 million was transferred to the REHP Trust Account and $50.8 million was transferred to the RPSPP Trust Account from the pre-existing restricted receipt accounts. No additional transfers have been made to the trust accounts. At the end of fiscal year 2011, the combined balance in the trust accounts and restricted receipt accounts was $406 million.
The Commonwealth has retained the Hay Group, a national employee benefits consulting firm, to provide actuarial services for GASB 45 implementation and reporting. In September 2011, the Hay Group issued its latest OPEB valuation for the REHP and RPSPP programs that reflected the following:
1. The combined unfunded actuarial accrued liability (“UAAL”) as of June 30, 2011 was $15.269 billion. The UAAL for the REHP was $12.837 billion comprised of an actuarial accrued liability of $12.908 billion less $71 million of plan assets. The UAAL for the RPSPP was $2.432 billion comprised of an actuarial accrued liability of $2.492 billion less $60 million of plan assets.
2. The annual required contribution (“ARC”) for the fiscal year ended June 30, 2011 was $1.042 billion. The REHP ARC was $883 million and the RPSPP ARC was $159 million.
3. The OPEB liability as of June 30, 2011 was $1.210 billion consisting of $933 million for the REHP and $277 million for the RPSPP. It is estimated that the OPEB liability will increase to $1.638 billion as of June 30, 2012.
Unemployment Compensation
The Commonwealth, as of June 30, 2012, had over $2,800.0 million in outstanding loans from the Federal Unemployment Account to the Pennsylvania Unemployment Compensation Fund (the “UC Fund”). The Commonwealth was one of 35 states that had exhausted its UC Fund balances during the most recent economic downtown. The federal loans, which began in March 2009, were needed to fund unemployment compensation benefits in excess of UC Fund receipts.
Under current federal law, such loans must be repaid by the states with interest. Under ARRA, a waiver of interest on federal loans was extended through the end of calendar year 2010. Beginning in January 2011, interest started to accrue on outstanding loan amounts. Pursuant to the Unemployment Compensation Law, for each year in which interest is due on federal loans the Department calculates an Interest Factor tax to be paid by Commonwealth
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employers on the first $8,000 in wages paid to each employee. The assigned Interest Factor rate was 0.44 percent for calendar year 2011 and 0.20 percent for calendar year 2012. In addition, federal law requires that employers in a state with an outstanding loan balance at the end of two consecutive years must pay additional federal unemployment taxes (“FUTA”) to repay the principal of the loan. Initially this FUTA tax increase is 0.3 percent on the federal wage base of $7,000 and automatically increases by 0.3 percent each year that the loan remains outstanding.
Based on current econometric assumptions and in the absence of legislative action to increase the UC Fund funding, the Commonwealth anticipated that the UC Fund would continue to require federal loans to pay benefits through at least 2018 and projected that its outstanding loan balance would total $286 million by 2018. Mandatory loan repayments through increased FUTA taxes, which began in 2011, were expected to grow from $94 million that year to an estimated $854 million annually by 2018. Additional voluntary loan repayments from the UC Fund would likely decrease from an estimated $2,560 million in fiscal year 2011 to $176 million by fiscal year 2018 and the estimated interest on the outstanding UC Fund loans would drop from $101 million annually in fiscal year 2011 to $9 million by fiscal year 2018. It is important to note that these repayment mechanisms do not have any impact on the Commonwealth’s General Fund. They are funded solely by federal taxes, the UC Fund and the Interest Factor assessment, none of which affect the revenues or expenditures of the General Fund.
To address these circumstances, on June 12, 2012 the Commonwealth amended its unemployment compensation law by enactment of Act 2012-60 (the “Act”), which among other things, authorized the issuance of up to $4.5 billion of unemployment compensation bonds by the Department of Labor and Industry acting through the Pennsylvania Economic Development Financing Authority. The proceeds of such bonds, (the “UC Bonds”) could be used to repay all outstanding loan advances, including interest, from the Federal unemployment trust fund as well as to provide additional funding for the UC Fund. UC Bonds were determined to be issued only if the Department of Labor and Industry determined that such issuance would result in a savings to Pennsylvania employers, whose FUTA payments would be adjusted to provide revenues sufficient to pay in full, all UC Bonds. A stable funding source, i.e. the Interest Factor tax (with a maximum rate not to exceed 1.1%) and the corresponding Debt Service Fund are used to finance the bonds.
Also, the Act includes a number of provisions that will stabilize the UC Fund on an ongoing basis. These provisions include enhanced collections authority for the Department of Labor and Industry, a longer statute of limitations for collection of fault overpayments, an increase in the taxable wage base, closing of loopholes in eligibility requirements, and an amnesty program to give employers and claimants an incentive to pay UC debts.
Overall, Act 60 will produce average annual savings of $319 million per year for the UC Trust Fund – all to the benefit of Commonwealth employers and workers.
On July 25, 2012, the Commonwealth closed on a $3,185.0 million interim financing with Citibank to both fully repay its outstanding loan from the Federal Unemployment Account and to fund the continued payment of benefits for a period through the Fall of 2012. On October 18, 2012, the Commonwealth closed on its $2,827.4 million Unemployment Compensation Revenue Bonds which were issued by the Pennsylvania Economic Development Financing Authority. Proceeds of the Unemployment Compensation Revenue Bonds were used to repay the Citibank interim financing. As result of the Citibank interim financing and the Commonwealth’s issuance of its Unemployment Compensation Revenue Bonds, the Commonwealth estimates that it will save employers over $150 million versus repaying the previously existing federal advances.
GOVERNMENT AUTHORITIES AND OTHER ORGANIZATIONS
Certain state-created organizations have statutory authorization to issue debt for which state appropriations to pay debt service thereon are not required. The debt of these organizations is funded by assets of, or revenues derived from, the various projects financed and is not a statutory or moral obligation of the Commonwealth. However, some of these organizations are indirectly dependent upon Commonwealth operating appropriations. In addition, the Commonwealth may choose to take action to financially assist these organizations. These
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organizations, their purposes and their outstanding debt, as computed by each organization, (excluding swap obligations) are as follows:
Delaware River Joint Toll Bridge Commission (“DRJTBC”). The DRJTBC, a public corporation of the Commonwealth and New Jersey, owns and operates bridges across the Delaware River. Debt service on bonds is paid from tolls and other revenues of the Commission. The DRJTBC had $414.3 million in bonds outstanding as of June 30, 2012.
Delaware River Port Authority (“DRPA”). The DRPA, a public corporation of the Commonwealth and New Jersey, operates several toll bridges over the Delaware River, and promotes the use of the Philadelphia-Camden port and promotes economic development in the port district. Debt service on bonds is paid from toll revenues and other revenues pledged by DRPA to repayment of bonds. The DRPA had $1,209.7 million in revenue bond debt outstanding as of June 30, 2012.
Pennsylvania Economic Development Financing Authority (“PEDFA”). The PEDFA was created in 1987 to offer pooled bond and other bond issues for both taxable and tax-exempt bonds on behalf of local industrial and commercial development authorities for economic development projects. Bonds may be secured by loan repayments and all other revenues of the PEDFA. The PEDFA had $2,907.7 million of debt outstanding as of June 30, 2012.
Pennsylvania Energy Development Authority (“PEDA”). The PEDA was created in 1982 to finance energy research projects, demonstration projects promoting the production or conservation of energy and the promotion, utilization and transportation of Pennsylvania energy resources. The authority’s funding is from appropriations and project revenues. Debt service on bonds is paid from project revenues and other revenues pledged by PEDA to repayment of bonds. The PEDA had no bonds outstanding as of June 30, 2012.
Pennsylvania Higher Education Assistance Agency (“PHEAA”). The PHEAA makes or guarantees student loans to students or parents, or to lending institutions or post-secondary institutions. Debt service on the bonds is paid by loan interest and repayments and other agency revenues. The PHEAA had $6,485.7 million in bonds outstanding as of June 30, 2012.
Pennsylvania Higher Educational Facilities Authority (“PHEFA”). The PHEFA is a public corporation of the Commonwealth established to finance college facilities. As of June 30, 2012, the PHEFA had $6,706.4 million in revenue bonds and notes outstanding payable from the lease rentals or loan repayments of the projects financed. Some of the lessees or borrowers, although private institutions, receive grants and subsidies from the Commonwealth.
Pennsylvania Industrial Development Authority (“PIDA”). The PIDA is a public corporation of the Commonwealth established for the purpose of financing economic development. The PIDA had $479.5 million in revenue bond debt outstanding on June 30, 2012, to which all of its revenues are pledged.
Pennsylvania Infrastructure Investment Authority (“Pennvest”). Pennvest was created in 1988 to provide low- interest rate loans and grants for the purpose of constructing new and improving existing water supply and sewage disposal systems to protect the health and safety of the citizens of the Commonwealth and to promote economic development within the Commonwealth. Loans and grants are available to local governments and, in certain circumstances, to private companies. The Pennvest bonds are secured by principal repayments and interest payments on Pennvest loans. Pennvest had $7.5 million of revenue bonds outstanding as of June 30, 2012
Pennsylvania Turnpike Commission (“PTC”). The PTC operates the Pennsylvania Turnpike System (“System”). Its outstanding indebtedness, $7,842.3 as of June 30, 2012, is payable from the net revenues of the System, primarily toll revenues and rentals from leases and concessions or from certain taxes dedicated to the System.
State Public School Building Authority (“SPSBA”). The SPSBA finances public school projects and community colleges. Bonds issued by the SPSBA are supported by the lease rental payments or loan repayments made to the SPSBA by local school districts and the community colleges. A portion of the funds appropriated annually by the Commonwealth as aid to local school districts and community colleges may be used by them to pay a portion of such lease rental payments or loan repayments. The SPSBA had $3,122.1 million of revenue bonds outstanding as of June 30, 2012.
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CITY OF PHILADELPHIA - PICA
The Pennsylvania Intergovernmental Cooperation Authority (“PICA”) was created by Commonwealth legislation in 1991 to assist the City of Philadelphia, the Commonwealth’s largest city, in remedying its fiscal emergencies. PICA is authorized to provide assistance through the issuance of funding debt and to make factual findings and recommendations to Philadelphia concerning its budgetary and fiscal affairs. This financial assistance has included grants used by the City for defeasance of certain City general obligation bonds, funding of capital projects and the liquidation of the cumulative general fund balance deficit of the City of Philadelphia as of June 30, 1992, of $224.9 million. At this time, Philadelphia is operating under a five-year fiscal plan approved by PICA on September 5, 2012.
No further bonds may be issued by PICA for the purpose of either financing capital projects or a deficit, as the authority for such bond issuance expired December 31, 1994. PICA’s authority to issue debt for the purpose of financing a cash flow deficit expired on December 31, 1995. Its ability to refund existing outstanding debt is unrestricted. PICA had $453.0 million in special tax revenue bonds outstanding as of June 30, 2012. Neither the taxing power nor the credit of the Commonwealth is pledged to pay debt service on PICA’s bonds.
LITIGATION
The Commonwealth’s Office of Attorney General and Office of General Counsel have reviewed the status of pending litigation against the Commonwealth, its officers and employees, and have provided the following brief descriptions of certain cases affecting the Commonwealth.
In 1978, the General Assembly approved a limited waiver of sovereign immunity with respect to lawsuits against the Commonwealth. This cap does not apply to tax appeals, such as Northbrook (now Allstate) as detailed below. Damages for any loss are limited to $250,000 for each person and $1,000,000 for each accident. The Supreme Court of Pennsylvania has held that this limitation is constitutional. Approximately 3,150 suits against the Commonwealth remain open. Tort claim payments for the departments and agencies, other than the Department of Transportation, are paid from departmental and agency operating and program appropriations. Tort claim payments for the Department of Transportation are paid from an appropriation from the Motor License Fund. The Motor License Fund tort claim appropriation for fiscal year 2011 is $20.0 million.
The Commonwealth also represents and indemnifies employees who have been sued under Federal civil rights statutes for actions taken in good faith in carrying out their employment responsibilities. There are no caps on damages in civil rights actions. The Commonwealth’s self insurance program covers damages in these cases up to $250,000 per incident. Damages in excess of $250,000 are paid from departmental and agency operating and program appropriations.
County of Allegheny v. Commonwealth of Pennsylvania and Pa. State Ass’n of County Comm’rs v. Commonwealth (Pa. Supreme Court)
In 1987, the Supreme Court of Pennsylvania held, in County of Allegheny v. Commonwealth of
Pennsylvania, 517 Pa. 65, 534 A.2d 760 (1987), that the statutory scheme for county funding of the judicial system is in conflict with the Pennsylvania Constitution. However, the Supreme Court of Pennsylvania stayed its judgment to afford the General Assembly an opportunity to enact appropriate funding legislation consistent with its opinion and permitted the system of county funding to remain in place in the interim.
Ruling in a separate mandamus action brought by the Pa. State Association of County Commissioners and several counties to enforce the order in County of Allegheny, the Supreme Court in Pa. State Ass’n of County Comm’rs v. Commonwealth, 545 Pa. 324, 681 A.2d 699 (1996), issued the requested writ of mandamus and appointed retired Justice Frank J. Montemuro, Jr., as special master to devise and submit a plan for implementation. The Interim Report of the Master recommended a four-phase transition to state funding of a unified judicial system, during each of which specified court employees would transfer into the state payroll system.
In Phase I of his Interim Report, Justice Montemuro recommended that the General Assembly provide for an administrative structure of local court administrators to be employed by the Administrative Office of
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Pennsylvania Courts, a state agency. Numbering approximately 165 people statewide, local court administrators are employees of the counties in which they work. On June 22, 1999, the Governor approved Act No. 1999-12, under which these approximately 165 county-level court administrators became employees of the Commonwealth. Act 12 also triggered the release of appropriations that had been made for this purpose in 1998 and 1999.
The remainder of Justice Montemuro’s recommendation for later phases remain pending before the Supreme Court of Pennsylvania at Dkt. No. 112 WM 1992. In 2008, the Association and county petitioners in that case moved the Court to enforce the mandamus and to require implementation of the recommendations made in the Interim Report of the Master. The Court held oral argument on the motion on December 9, 2009, and a decision is pending.
Northbrook Life Insurance Co. v. Commonwealth (now Allstate Life Insurance Co. v. Commonwealth)
The Northbrook case was the lead case in litigation with potentially the entire insurance industry that does business in Pennsylvania. On January 26, 2006, the en banc Commonwealth Court issued a conflicted decision in which the majority partially ruled for both parties. Northbrook Life Ins. Co. v. Commonwealth, 890 A.2d 1223 (Pa. Commw. Ct. 2006). Both parties filed exceptions. The Court denied all exceptions and upheld its earlier decision. Northbrook filed an appeal to the Pennsylvania Supreme Court. The Supreme Court ruled in Northbrook’s favor, but only on a technicality. See Northbrook Life Ins. Co. v. Commonwealth, 597 Pa. 18, 949 A.2d 333 (2008). The Court did not address the substantive findings of the Commonwealth Court. The Supreme Court’s decision resulted in an approximately $7,000.00 credit for Northbrook.
Counsel has now selected the Allstate case to relitigate the issues involved. Currently, there are docketed with the Commonwealth Court in excess of 40 cases representing 20 or more insurance companies. Dozens of additional cases are being held at the administrative boards pending this litigation.
The Northbrook (now Allstate) case and the other pending cases challenge the Department of Revenue’s application of portions of the Life and Health Guaranty Association Act of 1982 (the “Act”). The Act establishes a funding mechanism to fulfill defaulted obligations of insurance companies under life and health insurance policies and annuities contracts to insured Pennsylvania residents. In accordance with this funding mechanism, other insurance companies are assessed to provide the funds due to Pennsylvania residents insured by insurance companies which have become insolvent or are otherwise in default to their insureds.
Because the assessed insurance companies are paying the insurance obligations of other companies, a provision was placed in the Act which allows assessed insurance companies to claim a credit against their gross premiums tax liability based on such assessments.
The assessments on each company are broken into various categories including life insurance assessments, health insurance assessments, and annuity assessments, based on the type and amount of business each company transacts in Pennsylvania.
Life and health insurance premiums have always been subject to the premiums tax and there is no dispute that companies may claim credit for life and health assessments. Annuity considerations, however, were taxed for approximately a three-year period, 1992-1995. Some annuity considerations were subject to tax; others were not. After several changes of direction, the Department of Revenue decided to allow credits for assessments paid on taxable annuity considerations. Credits were not allowed for assessments paid on non-taxable annuities. There is no provision in the insurance law that restricts the credit to only the assessments paid on taxable annuities. Taxpayers claim the credit for assessments paid on all annuities, both during the period that annuities were taxed and going forward.
As noted above, following the Supreme Court’s decision in Northbrook, which left questions remaining, the Allstate case was selected to relitigate the issues involved. On March 25, 2010, by a 3-2 vote, an en banc panel of the Commonwealth Court ruled that Allstate was entitled to claim a credit for all annuity assessments paid to the Guaranty Fund. See Allstate Life Ins. Co. v. Commonwealth, 992 A.2d 910 (Pa. Commw. Ct. 2010).
The Commonwealth filed exceptions. Following briefing and oral argument before a seven-judge en banc
Commonwealth Court panel, a 4-3 majority of the Court on October 15, 2010, issued an unreported decision
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overruling the Commonwealth’s exceptions. See Allstate Life Ins. Co. v. Commonwealth, No. 89 F.R. 1997, 2010 Pa. Commw. Unpub. LEXIS 704 (2010).
The Commonwealth filed an appeal to the Pennsylvania Supreme Court at Dkt. No. 68 MAP 2010. On
September 28, 2011, the Court directed oral argument on the issue of whether the Act allows for tax credits for assessments paid on annuities despite statutory language that specifically excludes annuities in the computation of such credit. The Court heard oral argument on November 29, 2011, and a decision is pending.
The principal focus of the Allstate litigation is the proportional part fraction which is multiplied by the
assessments to determine the credit as interpreted by the Commonwealth Court. Potential tax refund exposure to the Commonwealth equals up to $150,000,000.
MCARE/HCPRA Cases (PA Supreme Court) On April 15, 2010, the Commonwealth Court of Pennsylvania issued two separate decisions granting
summary relief in favor of the petitioners in Pennsylvania Medical Society v. Department of Public Welfare, 994 A.2d 33 (Pa. Commw. Ct. 2010) (the “HCPRA Case”), and Hosp. & Healthsystem Ass’n of Pa. v. Commonwealth, 997 A.2d 392 (Pa. Commw. Ct. 2010) (the “MCARE Case”).
The Medical Care Availability and Reduction of Error (“MCARE”) Fund is a special fund, established within the Treasury pursuant to Act 13 of 2002, that pays claims against health providers for losses or damages awarded in medical professional liability actions in excess of their basic insurance coverage. All health care providers in Pennsylvania are required to pay annual assessments to the MCARE Fund. The Health Care Provider Retention (“HCPR”) Account was a special account within the Commonwealth’s General Fund established pursuant to Act 44 of 2003. The HCPR Account received a portion of the taxes charged on cigarettes and the monies in the HCPR Account were subject to annual appropriations by the General Assembly.
During the years 2003-2007, eligible health care providers in Pennsylvania were granted $946 million in abatements with respect to their MCARE assessments. Also during those years, $330 million was transferred from the HCPR Account to the MCARE Fund in order to assist the MCARE Fund in paying claims and meeting its other obligations.
As part of the fiscal year 2010 budget legislation, the General Assembly abolished the HCPR Account and
transferred the $708 million remaining in the HCPR Account to the General Fund. The General Assembly also transferred $100 million from the MCARE Fund to the General Fund.
The Commonwealth Court held in the HCPRA Case, by a vote of four to one, that the Commonwealth had
a duty to transfer funds from the HCPR Account to the MCARE Fund equal to the aggregate amount of abatements granted between 2003 and 2007. Subject to an accounting of the MCARE Fund and the HCPR Account, the amount of additional transfers to the MCARE Fund that would have been required under the Commonwealth Court’s ruling was between $446 and $616 million. The Commonwealth Court also held in the MCARE Case, by a vote of four to one, that the transfer of $100 million from the MCARE Fund to the General Fund was unlawful and violated the petitioners’ alleged vested rights in that money.
On appeal to the Supreme Court of Pennsylvania, the Commonwealth parties contend that the Commonwealth Court committed both factual and legal errors in rendering these decisions. The Commonwealth’s appeals automatically stayed the Commonwealth Court’s declaratory judgments and that court’s consideration of any further relief pending resolution of the Commonwealth’s appeals. Oral argument was held in both appeals in September 2011.
On February 29, 2012, the Supreme Court of Pennsylvania unanimously reversed the Commonwealth
Court in the HCPRA Case. The Court held that the Commonwealth did not violate the rights of the petitioner health care providers when the General Assembly closed the HCRP Account and transferred its funds to the General Fund.
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The Supreme Court has not yet decided the MCARE Case, however. The appeals in the MCARE Case are pending at Docket Numbers 20 and 21 MAP 2010.
In the event of a final decision in any litigation that is adverse to the Commonwealth and that would require
the payment or redistribution of Commonwealth funds or assets, the statutorily established administrative and budgetary processes would be used to provide the funds or authority to fulfill the Commonwealth’s liabilities. Litigation obligations imposed on the Commonwealth in excess of budgeted amounts would require the Commonwealth to identify new revenue sources, or to reduce budgeted expenses so as to avoid a budgetary deficit.
Harlee Manor, Inc., et al. v. Dept. of Public Welfare, et al. (Pa Commw. Ct.) This action, pending at Dkt. No. 264 MD 2005, challenges an assessment imposed on nursing homes to
generate revenue for the Medicaid budget. The parties are currently in negotiations with each other and the federal government to resolve the issue. If the Court strikes down the assessment, analysts estimate the Commonwealth would lose $331 million in state funds and a like amount in federal matching funds.
CG, et al. v. PDE, et al. (M.D. Pa.) This is a certified class action commenced in 2006. The representative plaintiffs are parents of students in
the Lancaster and Reading School Districts who challenge the Commonwealth of Pennsylvania’s method for distributing special education funds. The defendants are the Pennsylvania Department of Education and the Secretary of Education. The Office of Attorney General represents the defendants.
The plaintiffs contend that section 2509.5 of the Public School Code of 1949, 24 P.S. § 25-2509.5 – the
Pennsylvania statute that apportions special education funding – violates these federal laws: the Individuals with Disabilities Education Act (“IDEA”); section 504 of the Rehabilitation Act of 1973; the Due Process Clause of the Fourteenth Amendment (this claim was dismissed by Chief Judge Kane on summary judgment entered in January 2011); the Equal Educational Opportunities Act of 1974 (“EEOA”); and Title II of the Americans with Disabilities Act of 1990 (“ADA”). The claims against the Secretary under the ADA and the Rehabilitation Act were also dismissed on summary judgment because they cannot be made against individuals, only entities such as PDE. The court dismissed the plaintiffs’ constitutional claim because the judge discerned a rational basis for Pennsylvania’s special education funding formula. See CG v. Pa. Dep’t of Educ., No. 1:CV-06-1523, 2011 U.S. Dist. LEXIS 8339 (M.D. Pa. Jan. 28, 2011).
A bench trial on the claims that were not dismissed on summary judgment was held in September 2011.
The parties have submitted proposed findings of fact and conclusions of law, and a decision by Chief Judge Kane is pending.
PA Special Ed Subsidy Program and the IDEA The IDEA conditions a state’s receipt of federal funds for special education on the implementation of
statewide special education programs guaranteeing a free appropriate public education (“FAPE”) to eligible disabled children. Consistent with the IDEA, Pennsylvania appropriates funding to local school districts on an annual basis specifically for special education.
The plaintiffs allege that PA’s funding formula violates federal law because it requires PDE to allocate
special education funds to a school district based on average daily membership of special education students across the Commonwealth, rather than on the actual number of special education students enrolled in the district.
The plaintiffs seek declaratory judgment and an injunction requiring the Secretary of Education to abandon
the current funding formula and to distribute special education funds based upon the actual number of disabled students in each district and the actual cost of their special education needs.
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An adverse ruling on the funding formula and a requirement that the special education funds be distributed using a different formula likely would have an impact on the amounts budgeted for this purpose. For the current fiscal year, the primary state subsidy to schools for special education is approximately $1.027 billion. By contrast, the Basic Education Funding (BEF) subsidy for FY 2011-12 is approximately $5.35 billion. Were the Commonwealth’s funding formula found to be in violation of the IDEA, ADA/504, or EEOA, the Legislature likely would be forced to redistribute the subsidy amounts and perhaps would decide to make additional appropriations to remedy the violations. However, the General Assembly might decide to re-allocate funding from BEF to the Special Ed subsidy such that there would be no net cost to the Commonwealth. For example, a $50 million cost-shift from BEF to the special ed subsidy would require less than a 1% reduction in BEF.
LEP & Special Ed The most likely area where a court-ordered remedy might require additional state funding is for those
students that are both special needs students and Limited English Proficiency (LEP). A worst-case scenario might be that the court would require the Commonwealth to develop a subsidy that would be directed to this class of students and spent only on those students. Current data indicate that there are approximately 4,500 such students Commonwealth-wide. (There are about 270,000 total students with disabilities in the Commonwealth.) If a supplement of $5,000 were ultimately required for each student, the resulting expenditure would exceed $22 million.
Because the plaintiffs’ case has focused on those school districts that have both high percentages of special
needs students and high percentages of LEP students—of which there are only four—it is possible that a court-ordered remedy would focus only on those school districts (rather than all students with both identifying criteria) and direct additional funding to those districts only. Under such a district-based scenario, a lesser amount of new funding might be required.
Sears, et al. v. Corbett, et al.; and Weisblatt, et al. v. Corbett, et al. (Pa. Commw. Ct.)
Petitioners, former participants in the Pennsylvania adultBasic Insurance Coverage program (“adultBasic”),
filed a pair of class action suits against Commonwealth officials seeking declaratory, mandamus and injunctive relief to remedy claimed violations of the Pennsylvania Tobacco Settlement Act (Act), 35 P.S. § 5701.101 et. seq. They are docketed at No. 121 M.D. 2011 and No. 157 M.D. 2011.
Section 303 of the Act, 35 P.S. § 5701.303, establishes a Tobacco Settlement Fund (“Fund”) to receive and
distribute payments received by the Commonwealth pursuant to the Master Settlement Agreement (“Agreement”) of June 22, 2000. The Agreement was entered into on November 23, 1998, by the Commonwealth and leading United States tobacco manufacturers approved by the Court of Common Pleas of Philadelphia County on January 13, 1999. See 40 Pa. D.&C. 4th 225. See 35 P.S §§ 5671-75. The Agreement requires tobacco product manufactures to provide for home and community based care for tobacco use prevention and cessation efforts. 35 P.S. § 5701.101. The Agreement further mandates the establishment of a Health Endowment Account (“Account”) for long-term hope pursuant to Section 303 of the Act. 35 P.S. § 5701.303. The money placed into the Fund is governed by Section 306 of the Act, 35 P.S. § 5701.306, which sets forth a formula determining the percentage of appropriated money allocated for certain programs.
One of the programs created by Section 1303 of the Act was the adultBasic coverage insurance program.
The adultBasic program received appropriations from the Fund pursuant to section 306(b)(1)(vi) of the Act. 35 P.S. § 5701.306(b)(1)(vi). Section 306(b)(1)(vi) of the Act established that the adultBasic program shared its funding stream with the Medical Benefits For Workers With Disabilities Program (“MAWD”), established by Section 1503 of the Act, 35 P.S. § 5701.1503.
The ultimate purpose of the lawsuit is to force the legislature to restore adultBasic. The gravamen of
petitioners’ legal claims is predicated on their contention that in redirecting money from the Tobacco Settlement Fund through certain 2010 and 2011 amendments to The Fiscal Code, the legislature allegedly “violated” the Act.
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As part of their challenge to the Fiscal Code amendments, the petitioners assert that the amendments were
enacted in violation of the Pennsylvania Constitution’s “single subject” rule. PA. CONST. art. III, § 3. The petitioners also allege violations of Article III, Sections 6 and 11, of the Pennsylvania Constitution. Petitioners claim that the General Assembly, when enacting the 2010 and 2011 amendments to the Fiscal Code, effectively amended the Fiscal Code by reference only to its title, in violation of Article III, Section 6, of the Pennsylvania Constitution. They also claim the legislative process occurred in a manner inconsistent with the provisions of the Act in violation of the Article III, Section 11, requirement that the general appropriation bill embrace nothing but appropriations for the executive, legislative and judicial departments of the Commonwealth, for the public debt and for public schools.
After discontinuation of the adultBasic program, Petitioners filed a request for preliminary injunctive relief
with the Commonwealth Court, requesting the court to enjoin the State Treasurer from approving the transfers of funds as directed by the Fiscal Code amendments. The court denied the request, holding that “because the funds sought to be frozen were to be used to balance the budget, greater harm would be caused by granting the injunction rather than refusing it and issuing it would not restore the parties to the status quo.” Sears v. Corbett, No. 157 M.D. 2011. The Court noted that MAWD received its funding from the Fund before adultBasic because MAWD was an entitlement program in contrast to the adultBasic program, which was subsidized by Pennsylvania Blue Cross/Blue Shield plans pursuant to the Community Health Reinvestment Agreement that expired in December 2010. Id. Moreover, the Court determined that in 2010, only $20 million from the Fund was available to fund adultBasic, which was insufficient to allow adultBasic to continue operating. Id. Thereafter, petitioners in both cases amended their petitions, adding the constitutional challenges associated with the 2011 amendments to the Fiscal Code.
The Commonwealth filed preliminary objections to the amended petitions for review in both actions. On
June 27, 2012, an en banc panel of the Commonwealth Court sustained in part and overruled in part the respondents’ preliminary objection in the Sears case and directed the respondents to answer the amended petitions for review within 30 days. The Court made the same decision in the Weisblatt case on June 28, 2012.
The Court sustained the preliminary objections of the General Assembly, holding that the doctrine of
sovereign immunity precludes the Court from ordering the General Assembly to take legislative action and, therefore, the Court dismissed all claims made against the General Assembly. However, the Court ruled that the petitioners’ claims that the legislation amending the Fiscal Code in 2010 and 2011 violated Article III, sections 3 and 6, of the Constitution of Pennsylvania could be pursued, and equitable relief directed to executive officials could be granted by the Court were it to agree that the statutes were enacted unconstitutionally.
The respondents do not agree that the 2010 and 2011 amendments to the Fiscal Code were
unconstitutionally enacted. In addition, the respondents contend that even if the 2010 and 2011 amendments to the Fiscal Code were unconstitutionally enacted, adultBasic could not be revived since the funding allocated by the Tobacco Settlement Act for use in jointly supporting adultBasic and MAWD is sufficient to support only MAWD, which under the law must be given priority over adultBasic. Commonwealth Court’s opinions did not address this part of the Commonwealth’s defense in the litigation.
Were the Court ultimately to enter a judgment in favor of the petitioners and effectively order restoration of
adultBasic, Commonwealth officials might be required to take administrative action to redistribute funds in a manner affecting other programs, including MAWD.
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SELECTED DATA ON THE COMMONWEALTH OF PENNSYLVANIA
General The Commonwealth of Pennsylvania is one of the most populous states, ranking sixth behind California, Texas, New York, Florida, and Illinois. Pennsylvania is an established state with a diversified economy. Pennsylvania had been historically identified as a heavy industrial state. That reputation has changed over the last thirty years as the coal, steel and railroad industries declined. The commonwealth’s business environment readjusted with a more diversified economic base. This economic readjustment was a direct result of a long-term shift in jobs, investment, and workers away from the northeast part of the nation. Currently, the major sources of growth in Pennsylvania are in the service sector, including trade, medical, health services, education and financial institutions.
Pennsylvania’s agricultural industries remain an important component of the commonwealth’s economic structure, accounting for more than $5.4 billion in crop and livestock products annually. In 2010, agribusiness and food related industries reached export sales surpassing $1.3 billion in economic activity. Over 63,000 farms form the backbone of the State's agricultural economy. Farmland in Pennsylvania includes over four million acres of harvested cropland and three million acres of pasture and farm woodlands - nearly one-third of the commonwealth’s total land area. Agricultural diversity in the commonwealth is demonstrated by the fact that Pennsylvania ranks among the top ten states in the production of a variety of agricultural products.
Pennsylvania’s extensive public and private forests provide a vast source of material for the lumber, furniture, and paper products industries. The forestry and related industries accounts for 1.5% of employment with economic activity of nearly $5 billion in sales in domestic and international trade. Additionally, the commonwealth derives a good water supply from underground sources, abundant rainfall, and a large number of rivers, streams, and lakes. Other natural resources include major deposits of coal, petroleum, and natural gas. Annually, about 66 million tons of anthracite and bituminous coal, 168 billion cubic feet of natural gas, and about 3.6 million barrels of oil are extracted from Pennsylvania. Pennsylvania is one of the top 10 producing states in the country for aggregate/crushed stone. The value of non-coal mineral production in PA is approximately $1billion annually.
Pennsylvania is a Mid-Atlantic state within easy reach of the populous eastern seaboard and, as such, is the keystone to the Midwest. A comprehensive transportation grid enhances the commonwealth’s strategic geographic position. The commonwealth’s water systems afford the unique feature of triple port coverage, a deep-water port at Philadelphia, a Great Lakes port at Erie and an inland water port at Pittsburgh. Between air, rail, water, and road, Pennsylvania is easily accessible for both inter and intra state trade and commerce.
Population The commonwealth is highly urbanized. Of the commonwealth’s 2011 mid-year population estimate, 79 percent resided in the 15 Metropolitan Statistical Areas (“MSAs”) of the commonwealth. The largest MSAs in the commonwealth are those that include the cities of Philadelphia and Pittsburgh, which together contain almost 44 percent of the State’s total population. The population of Pennsylvania, 12.7 million people in 2011, according to the U.S. Bureau of the Census, represents a population growing slower than the nation with a higher portion than the nation or the region comprised of persons 45 or over. The following tables present the population trend from 2002 to 2011 and the age distribution of the population for 2011.
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Population Trends Pennsylvania, Middle Atlantic Region and the United States
2002-2011
Total Population Total Population as In Thousands a % of 2002 base
Middle Middle As of Atlantic Atlantic
July 1 PA Region (a) U.S. PA Region (a) U.S.
2002 .................. 12,326 40,032 287,803 100% 100% 100% 2003 .................. 12,357 40,172 290,326 100 100 101 2004 .................. 12,388 40,297 293,045 100 101 102 2005 .................. 12,418 40,370 295,753 101 101 103 2006 .................. 12,471 40,451 295,593 101 101 103 2007 .................. 12,522 40,581 301,579 102 101 105 2008 .................. 12,566 40,697 304,374 102 102 106 2009 .................. 12,604 40,854 307,006 102 102 107 2010 .................. 12,717 40,912 309,330 103 103 107 2011 .................. 12,742 40,029 311,591 103 103 108 (a) Middle Atlantic Region: Pennsylvania, New York, New Jersey Source: U.S. Department of Commerce, Bureau of the Census
Population by Age Group — 2011 Pennsylvania, Middle Atlantic Region and the United States
Middle Atlantic Age Pennsylvania Region(a) United States
Under 5 years ................. 5.7 % 5.9 % 6.4 % 5-24 years ....................... 25.9 26.1 27.2 25-44 years ..................... 24.5 26.1 26.5 45-64 years ..................... 28.3 27.6 26.6 65 years and over ............ 15.6 14.3 13.3
(a) Middle Atlantic Region: Pennsylvania, New York, New Jersey. Source: U.S. Department of Commerce, Bureau of the Census
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Employment Non-agricultural employment in Pennsylvania over the 10 years ending in 2011 increased at an average annual rate of 0.08 percent compared with an increase 0.05 percent rate for the Middle Atlantic region and 0.09 percent rate for the U.S. The following table shows employment trends from 2002 through 2011.
Non-Agricultural Establishment Employment Trends
Pennsylvania, Middle Atlantic Region and the United States 2002-2011
Total Establishment Employment Total Establishment Employment In Thousands as a % of 2002 base
Middle Middle Calendar Atlantic Atlantic Year PA Region(a) US PA Region(a) US
2002 ............... 5,641 18,087 130,341 100 % 100 % 100 % 2003 ............... 5,611 17,999 129,999 99 99 99 2004 ............... 5,644 18,108 131,435 99 98 99 2005 ............... 5,702 18,278 133,703 99 99 100 2006 ............... 5,756 18,446 136,806 100 100 101 2007 ............... 5,797 18,610 137,598 101 101 103 2008 ............... 5,799 18,640 136,790 102 102 104 2009 ............... 5,615 18,066 130,807 102 102 104 2010 ............... 5,616 18,023 129,874 99 99 99 2011 ............... 5,681 18,169 131,359 100 100 99
(a) Middle Atlantic Region: Pennsylvania, New York, New Jersey. Source: U.S. Department of Labor, Bureau of Labor Statistics.
Non-manufacturing employment in Pennsylvania has increased in recent years and reached 90.1 percent of total employment by 2011. Consequently, manufacturing employment constitutes a diminished share of total employment within the commonwealth. Manufacturing, contributing 9.9 percent of 2011 non-agricultural employment, has fallen behind the services sector, the trade sector and the government sector as the 4th largest single source of employment within the commonwealth. In 2011, the services sector accounted for 47.9 percent of all non-agricultural employment while the trade sector accounted for 15.0 percent. The following table shows trends in employment by sector for Pennsylvania from 2007 through 2011.
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Non-Agricultural Establishment Employment by Sector Pennsylvania
2007-2011 (In Thousands)
The following table presents the percentages of non-agricultural employment in various sectors in Pennsylvania and the United States in 2011.
Non-Agricultural Establishment Employment by Sector Pennsylvania and the United States 2011 Calendar Year
Pennsylvania United States
Manufacturing ............................................... 9.9% 8.9 %
Trade (a) ........................................................ 15.0 15.4
Finance (b) .................................................... 5.4 5.8 Services ......................................................... 47.9 44.7 Government ................................................... 13.1 16.8
Utilities(c) ..................................................... 4.2 3.7 Construction .................................................. 3.9 4.2 Mining ........................................................... 0.6 0.5
Total(d).................................................... 100.0 % 100.0 %
(a) Wholesale and retail trade. (b) Finance and insurance. (c) Includes transportation, communications, electric, gas and
sanitary services. (d) Discrepancies occur due to rounding. Source: U.S. Department of Labor, Bureau of Labor Statistics.
2007 2008 2009
Employees % Employees % Employees % Employees % Employees %
Manufacturing: Durable……………… 407.4 7.0 398.5 6.9 344.8 6.1 334.3 5.9 341.4 6.0 Non-Durable………… 251.7 4.3 245.2 4.2 229.3 4.1 225.7 4.0 222.5 3.9
Total Manufacturing
(d)…… 659.1 11.4 643.7 11.1 574.1 10.2 560.0 10.0 563.9 9.9
Non-Manufacturing:
Trade(a)……………… 894.7 15.4 887.1 15.3 850.3 15.1 848.5 15.1 854.7 15.0
Finance(b)
…………… 332.8 5.7 329.8 5.7 318.4 5.7 311.0 5.5 309.5 5.4 Services…………….. 2,644.8 45.6 2,674.5 46.1 2,638.8 47.0 2,669.5 47.5 2,721.4 47.9 Government………… 747.5 12.9 752.0 13.0 759.6 13.5 761.2 13.5 744.1 13.1
Utilities(c)
……………. 239.1 4.1 238.8 4.1 230.5 4.1 231.6 4.1 238.8 4.2 Construction………… 262.3 4.5 254.6 4.4 224.6 4.0 215.9 3.8 221.8 3.9 Mining………………. 20.4 0.4 21.6 0.4 21.7 0.4 25.9 0.5 32.9 0.6
Total
Non-Manufacturing(d)
5,141.6 88.6 5,158.4 88.7 5,043.9 89.8 5,063.6 90.0 5,123.2 90.1
Total Employees(d)(e)5,800.7 100.0 5,802.1 99.8 5,618.0 100.0 5,623.6 100.0 5,687.1 100.0
(a) Wholesale and retail trade.(b) Finance, insurance and real estate.(c) Includes transportation, communications, electric, gas and sanitary services.(d) Discrepancies occur due to rounding.(e) Does not include workers involved in labor-management disputes.
Source: PA Bureau of Labor & Industry
2010 2011CALENDAR YEAR
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Within the manufacturing sector of Pennsylvania’s economy, which now accounts for less than one-tenth of total non-agricultural employment in Pennsylvania, the fabricated metals industries employed the largest number of workers. Employment in fabricated metals industries was 14.3 percent of Pennsylvania manufacturing employment but only 1.4 percent of total Pennsylvania non-agricultural employment in 2011. The following table shows trends in manufacturing employment by industry for Pennsylvania from 2007 through 2011.
Manufacturing Establishment Employment by Industry
Pennsylvania 2007-2011 (In Thousands)
Unemployment Pennsylvania’s annual average unemployment rate was equivalent to the national average throughout the 2000’s. Slower economic growth caused the unemployment rate in the commonwealth to rise to 8.5 percent in early 2010 compared to 4.4 percent annual unemployment rate in 2007. As of May 2012, the most recent month for which figures are available, Pennsylvania had a seasonally adjusted annual unemployment rate of 7.4 percent. The following table represents the annual non-adjusted unemployment rate in Pennsylvania, the Middle Atlantic Region, and the United States from 2002 through 2011.
Employees % Employees % Employees % Employees % Employees %
Durable Goods: Primary Metals……………. 42.6 6.2 41.6 6.5 35.6 6.2 36.2 6.5 38.4 6.8 Fabricated Metals…………. 91.5 12.8 91.7 14.2 79.5 13.8 77.6 13.9 80.6 14.3 Machinery (excluding electrical)…. 56.8 7.9 56.4 8.8 47.4 8.3 45.2 8.1 47.0 8.3 Electrical Equipment………. 26.9 3.7 27.1 4.2 24.8 4.3 24.7 4.4 25.9 4.6 Transportation Equipment…. 43.5 6.2 43.6 6.8 38.6 6.7 36.9 6.6 37.4 6.6 Furniture Related Products…… 22.3 3.5 20.3 3.2 16.1 2.8 14.9 2.7 14.8 2.6 Other Durable Goods……… 123.8 19.2 117.8 18.3 102.8 17.9 98.8 17.6 97.3 17.3
Total Durable Goods(a)
…... 407.4 59.5 398.5 61.9 344.8 60.1 334.3 59.7 341.4 60.5
Non-Durable Goods: Pharmaceutical/Medicine… 22.0 3.3 22.3 3.5 21.7 3.8 21.3 3.8 20.2 3.6 Food Products…………….. 69.0 10.5 67.8 10.5 66.8 11.6 66.5 11.9 66.5 11.8 Chemical Products………… 46.4 7.6 45.9 7.1 43.5 7.6 43.0 7.7 42.2 7.5 Printing and Publishing…… 35.2 5.5 33.2 5.2 29.9 5.2 28.2 5.0 26.9 4.8 Plastics/Rubber Products……… 39.5 5.9 39.1 6.1 35.0 6.1 35.2 6.3 35.4 6.3 Other Non-Durable Goods… 39.6 7.5 36.9 5.7 32.4 5.6 32.2 5.8 32.2 5.7
Total Non-Durable Goods(a)251.7 40.3 245.2 38.1 229.3 39.9 225.7 40.3 222.5 39.5
Total Manufacturing Employees
(a)…………… 659.1 100.0 643.7 100.0 574.1 100.0 560.0 100.0 563.9 100.0
(a) Discrepancies occur due to roundingSource: U.S. Department of Labor, Bureau of Labor Statistics.
2007 2008 2010 20112009
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Annual Average Unemployment Rate
Pennsylvania, Middle Atlantic Region and the United States 2002-2011
Calendar Year Pennsylvania Middle Atlantic Region(a) United States
2002 ........................................... 5.6 5.9 5.8 2003 ........................................... 5.7 6.1 6.0 2004 ........................................... 5.4 5.5 5.5 2005 ........................................... 5.0 4.9 5.1 2006 ........................................... 4.5 4.6 4.6 2007 ........................................... 4.4 4.4 4.6 2008 ........................................... 5.4 5.4 5.8 2009 ........................................... 8.0 8.4 9.3 2010 ........................................... 8.5 8.8 9.6 2011 ........................................... 7.9 8.3 8.9
(a) Middle Atlantic Region: Pennsylvania, New York, New Jersey. Source: U.S. Department of Labor, Bureau of Labor Statistics.
The following table presents the thirty largest non-governmental employers in Pennsylvania:
Commonwealth of Pennsylvania
Thirty Largest Non-Governmental Employers
September 2011
Company Rank
Company Rank
Wal-Mart Associates ...................................... 1 Vanguard Group Inc ........................................ 16 University of Pennsylvania ............................. 2 GMRI Inc…… ................................................ 17 Pennsylvania State University ........................ 3 Comcast Cablevision Corp (PA). .................... 18 Giant Food Stores ............................................ 4 K-MART Corporation ..................................... 19 UPMC Presbyterian ......................................... 5 Heartland Employment Services ..................... 20 University of Pittsburgh .................................. 6 US Airways Inc ............................................... 21 United Parcel Service Inc .............................. 7 Pennsylvania CVS Pharmacy LLC …… ......... 22 PNC Bank NA ................................................. 8 Thomas Jefferson University Hospital ............ 23 Giant Eagle Inc ................................................ 9 Milton Hershey Medical Center. ..................... 24 Weis Markets Inc ............................................. 10 Temple University.. ......................................... 25 Lowe’s Home Centers Inc. .............................. 11 Highmark Inc.. ................................................. 26 Merck Sharpe & Dohme Corp ......................... 12 Western Penn Allegheny Health ...................... 27 Target Div of Target Corp ............................... 13 Wells Fargo Bank NA ..................................... 28 The Home Depot USA Inc .............................. 14 Sheetz Inc…… ................................................ 29 The Children’s Hospital of Philadelphia ......... 15 Eat’n Park Hospitality Group .......................... 30
Source: Pennsylvania Department of Labor, Office of Employment Security.
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Personal Income Personal income in the commonwealth for 2011 is $541.2 billion, an increase of 4.8 percent over the previous year. During the same period, national personal income increased by 5.0 percent. Based on the 2011 personal income estimates, per capita income is at $42,478 in the commonwealth compared to per capita income in the United States of $41,663. The following tables represent annual personal income and per capita income from 2002 through 2011.
Personal Income
Pennsylvania, Mideast Region and the United States 2002-2011
Total Personal Income Total Personal Income Dollars in Millions As a % of 2002 base
Mideast Mideast
Year PA Region(a) US.b) PA Region(a) US
2002 ........... $ 387,663 $ 1,662,680 $ 9,054,702 100 % 100 % 100 % 2003 ........... 399,547 1,707,492 9,369,072 103 102 103 2004 ........... 417,790 1,808,113 9,928,790 107 108 109 2005 ........... 432,247 1,898,598 10,476,669 111 114 115 2006 ........... 462,703 2,046,137 11,256,516 119 123 124 2007 ........... 489,076 2,177,747 11,900,562 126 130 131 2008 ........... 512,992 2,271,109 12,451,660 132 136 137 2009 ........... 499,700 2,185,633 11,916,773 128 131 131 2010 ........... 516,390 2,271,403 12,353,577 133 136 136 2011 ........... 541,297 2,374,691 12,981,741 139 142 143
(a) Mideast Region: Pennsylvania, New York, New Jersey, Maryland, District of Columbia, and Delaware. (b) Sum of States. Source: U.S. Department of Commerce, Bureau of Economic Analysis
Per Capita Income Pennsylvania, Mideast Region and the United States
2002-2011
Per Capita Income As % of US
Calendar Mideast Mideast Year PA Region(a) U.S. PA Region(a)
2002 ......... $ 31,438 $ 35,496 $ 31,481 99 % 113 % 2003 ......... 32,288 36,303 32,295 100 112 2004 ......... 33,664 38,338 33,909 99 113 2005 ......... 34,719 40,191 35,452 98 113 2006 ......... 36,984 43,227 37,725 98 114 2007 ......... 38,927 45,873 39,506 98 116 2008 ......... 40,674 47,627 40,947 99 116 2009 ......... 39,449 45,587 38,846 101 117 2010 ......... 40,604 47,122 39,937 102 118 2011 ......... 42,478 49,081 41,663 102 118
(a) Mideast Region: Pennsylvania, New York, New Jersey, Maryland, District of Columbia, and Delaware. Source: U.S. Department of Commerce, Bureau of Economic Analysis
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The following table presents growth rates in personal income and selected components of personal income for Pennsylvania, the Mideast Region and the United States from 2007 through 2011.
Annual Growth Rates
Personal Income and Selected Components of Personal Income Pennsylvania, Mideast Region and the United States
Calendar Year Pennsylvania Mideast Region(a) United States
Total Personal Income 2007 ................................................................ 5.7% 6.4% 5.7% 2008 ................................................................ 4.9 4.2 4.6 2009 ................................................................ -2.6 -3.8 -4.3 2010 ................................................................ 3.3 3.9 3.7 2011 ................................................................ 4.8 4.5 5.0 Manufacturing 2007 ................................................................ -0.9% -0.1% 0.7% 2008 ................................................................ 1.0 1.1 0.2 2009 ................................................................ -10.8 -10.4 -11.2 2010 ................................................................ 1.0 2.5 1.7 2011 ................................................................ 3.6 1.7 4.6 Trade (b) 2007 ................................................................ 3.6% 4.3% 4.1% 2008 ................................................................ -1.3 -1.7 -1.8 2009 ................................................................ -2.5 -3.0 -4.5 2010 ................................................................ 2.7 3.0 2.5 2011 ................................................................ 4.9 4.6 5.1 Finance(c) 2007 ................................................................ 2.4% 7.7% 4.1% 2008 ................................................................ 1.5 -3.5 -3.5 2009 ................................................................ -3.2 -11.5 -5.4 2010 ................................................................ 2.5 6.8 3.9 2011 ................................................................ 4.1 4.2 4.8 Services 2007 ................................................................ 7.7% 7.2% 7.5% 2008 ................................................................ 7.8 9.4 8.4 2009 ................................................................ -6.4 -6.4 -7.3 2010 ................................................................ 2.6 3.7 4.2 2011 ................................................................ 4.9 6.8 7.1 Utilities 2007 ................................................................ 1.8% -1.5% -1.2% 2008 ................................................................ 9.3 12.2 13.3 2009 ................................................................ -9.2 -10.4 -6.8 2010 ................................................................ 2.1 5.3 0.7 2011 ................................................................ 8.2 3.7 3.0 Construction 2007 ................................................................ -0.9% 0.6% -0.4% 2008 ................................................................ -1.3 0.7 -4.6 2009 ................................................................ -11.8 -9.7 -14.0 2010 ................................................................ 0.7 -1.1 --2.9 2011 ................................................................ 4.4 2.1 1.2 Mining 2007 ................................................................ -4.2% -8.0% -3.0% 2008 ................................................................ 49.0 22.0 44.5 2009 ................................................................ -39.6 -44.9 -47.1 2010 ................................................................ 28.8 23.1 9.5 2011 ................................................................ 38.1 34.7 25.4
(a) Mideast Region: Delaware, District of Columbia, Maryland, Pennsylvania, New York, and New Jersey. (b) Wholesale and retail trade. (c) Finance and insurance. Source: U.S. Department of Commerce, Bureau of Economic Analysis
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The commonwealth’s average hourly wage rate of $17.49 for manufacturing and production workers compares below the national average of $18.94 for 2011. The following table presents the average hourly wage rates for 2007 through 2011.
Average Hourly Wages Production Workers on Manufacturing Payrolls
Pennsylvania and the United States 2007-2011
Calendar Year PA US
2007 .............................. $ 15.25 $ 17.26 2008 .............................. 15.61 17.75 2009 .............................. 16.28 18.24 2010 .............................. 16.88 18.61 2011 .............................. 17.49 18.94
Source: U.S. Department of Labor, Bureau of Labor Statistics
Market and Assessed Valuation of Real Property Annually, the State Tax Equalization Board (the “STEB”) determines an aggregate market value of all taxable real property in the commonwealth. The STEB determines the market value by applying assessment to sales ratio studies to assessment valuations supplied by local assessing officials. The market values certified by the STEB do not include property that is tax exempt but do include an adjustment correcting the data for preferential assessments granted to certain farm and forestlands.
The table below shows the assessed valuation as determined and certified by the counties and the market value and the assessed to market value ratio determined by the STEB for real property over the last ten years. Increases in valuations shown below result from reassessment valuations by the counties, changes in property tax rolls and increases in the real value of existing property. In computing the market values for uneven-numbered years, the STEB is statutorily restricted to certifying only those changes in market value that result from properties added to or removed from the assessment rolls. The STEB is permitted to adjust the market valuation to reflect any change in real estate values or other economic change in value only in even-numbered years. This restriction accounts for the two-year pattern of market value changes apparent in the data below.
Valuations of Taxable Real Property
2001-2010 Ratio of Assessed
Valuation to Year Market Value(a) Assessed Valuation Market Value(a)
2001 $ 430,102,389,400 $ 310,111,943,560 72.1 2002 467,311,009,700 325,451,064,697 69.6 2003 478,362,689,800 348,726,965,926 72.9 2004 523,595,339,800 352,014,550,601 67.2 2005 546,222,770,500 378,011,903,306 69.2 2006 619,788,036,800 393,869,708,825 63.5 2007 633,886,898,100 400,428,104,035 63.1 2008 708,521,506,000 406,426,527,325 57.3 2009 717,475,983,911 431,911,595,146 60.2 2010 753,847,457,900 436,995,393,629 57.9
(a) Value adjusted for difference between regular assessment and preferential assessment permitted on certain farm and forestlands. Source: Annual Certifications by the State Tax Equalization Board July 2011.
APPENDIX B-1
DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE ENERGY INDENTURE
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APPENDIX B-1
DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE ENERGY INDENTURE
The following is a brief summary of certain definitions and certain provisions of the Energy Indenture (referred to as the “Indenture” within this Appendix B-1). This summary does not purport to be comprehensive or definitive and is subject to all of the terms and provisions of the Indenture, a copy of which will be available at the offices of the Energy Trustee (referred to as the “Trustee” within this Appendix B-1). Unless otherwise specified below, all capitalized terms used in this Appendix B-1 and not defined below have the same meaning given to such terms in the forepart of this Official Statement.
Certain Definitions
The following terms apply to the summaries of the Indenture and to terms not otherwise defined in this Official Statement.
“Additional Bonds” means Bonds issued pursuant to the provisions of the Indenture described under the caption “Additional Bonds” below.
“Administrative Fees and Expenses” means any application, commitment, financing or similar fee charged, or reimbursement for administrative or other expenses incurred by the Trustee.
“Authorized Officer” means the Chairperson or the Treasurer of the Authority or any person or persons designated by the Authority by resolution to act on behalf of the Authority.
“Bond” or “Bonds” means the Authority’s Prior Bonds, the 2013A Bonds and any Additional Bonds authorized by, and at any time Outstanding pursuant to, the Indenture.
“Bond Counsel” means legal counsel of recognized national standing in the field of obligations the interest on which is excluded from gross income for federal income tax purposes, selected by the Authority and not objected to by the Trustee or the Credit Facility Provider (if any).
“Bond Payment Obligations” means the Authority’s obligation to pay the principal or Redemption Price of and interest on the Bonds, including (without duplicating any Financing Facility Payment Obligations) Bonds held by Financing Facility Providers.
“Business Day” means a day that is not a Saturday, Sunday or legal holiday on which banking institutions in the Commonwealth, the State of New York or in any state in which the office of the Liquidity Facility Provider (if any), the Credit Facility Provider (if any) or the Trustee is located are authorized to remain closed or a day on which the New York Stock Exchange is closed.
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“Certificate,” “Statement,” “Request,” “Requisition” and “Order” of the Authority, mean, respectively, a written certificate, statement, request, requisition or order signed in the name of the Authority by an Authorized Officer or such other person as may be designated and authorized to sign for the Authority and designated by an Authorized Officer in writing to the Trustee. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument.
“Clearing Fund” means the Clearing Fund established in the Indenture.
“Closing Certificate” means a Certificate of the Authority delivered pursuant to the Indenture in connection with the issuance of Bonds.
“Code” means the Internal Revenue Code of 1986, as amended, or any successor statute thereto, and any regulations promulgated thereunder.
“Costs of Issuance” means all items of expense directly or indirectly payable by or reimbursable to the Authority and related to the authorization, issuance, sale and delivery of the Bonds, including but not limited to costs of preparation and reproduction of documents, printing expenses, filing and recording fees, initial fees and charges of the Trustee and its counsel, legal fees and charges, fees and disbursements of consultants and professionals, fees and charges for preparation, execution and safekeeping of the Bonds and any other cost, charge or fee in connection with the original issuance of the Bonds.
“Credit Facility” means a letter of credit, including, if applicable, a confirming letter of credit, bond insurance policy, surety or other credit facility issued by a commercial bank, savings institution, insurer or other financial institution, or obtained under a government insurance program, which, by its terms, shall secure the payment of the principal of and interest on a Series of Bonds when due.
“Credit Facility Provider” means the issuer of a Credit Facility.
“Debt Service Fund” means the Debt Service Fund established in the Indenture.
“Debt Service Requirements” means, with respect to a Payment Date, all Bond Payment Obligations and Parity Financing Facility Payment Obligations coming due and payable on such Payment Date.
“Debt Service Reserve Fund” means the Debt Service Reserve Fund established in the Indenture.
“Debt Service Reserve Fund Requirements” means the amount set forth for a particular series of Bonds in the Supplemental Indenture pursuant to which they were issued.
“Defeasance Securities” means the following: (i) cash; (ii) U.S. Treasury Certificates, Notes and Bonds (including State and Local Government Series – “SLGs”); (iii) direct obligations of the U.S. Treasury which have been stripped by the Treasury itself, CATS,
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TIGRS and similar securities; (iv) the interest component of Resolution Funding Corp. strips which have been stripped by request to the Federal Reserve Bank of New York in book entry form; (v) pre-refunded municipal bonds rated “Aaa” by Moody’s and “AAA” by S&P. If, however, the issue is only rated by S&P (i.e., there is no Moody’s rating), then the pre-refunded bonds must have been pre-refunded with cash, direct U.S. or U.S. guaranteed obligations, or AAA rated pre-refunded municipals to satisfy this condition; (vi) obligations issued by the following agencies which are backed by the full faith and credit of the United States: (a) U.S. Export-Import Bank (Eximbank) - Direct obligations or fully guaranteed certificates of beneficial ownership; (b) Farmers Home Administration (FmHA) - Certificates of beneficial ownership; (c) Federal Financing Bank; (d) General Services Administration - Participation certificates; (e) U.S. Maritime Administration - Guaranteed Title XI financing; and (f) U.S. Department of Housing and Urban Development (HUD) - Project Notes; Local Authority Bonds; New Communities Debentures - U.S. government guaranteed debentures; and U.S. Public Housing Notes and Bonds - U.S. government guaranteed public housing notes and bonds.
“Department” means the Department of Community and Economic Development of the Commonwealth.
“Electronic Means” means telecopy, telegraph, telex, facsimile transmission, email transmission or other similar electronic means of communication, including a telephonic communication confirmed by writing or written transmission.
“Event of Default” means any of the events described under “Events of Default” below.
“Event of Non-Appropriation” shall be deemed to have occurred under the Indenture if the Legislature shall fail to appropriate funds to the Department for any Fiscal Year in the amount required for the Department to meet its obligations to the Authority under the Energy Service Agreement (referred to as the “Service Agreement” in this Appendix B-1).
“Favorable Opinion of Bond Counsel” means, with respect to any action the occurrence of which requires such an opinion, an Opinion of Counsel, which shall also be Bond Counsel, to the effect that such action is permitted under the Indenture and, if such Bonds are Tax-Exempt, will not, in and of itself, result in the inclusion of interest on the Bonds in gross income for federal income tax purposes.
“Financing Facility” means any Swap Agreement, Credit Facility or Liquidity Facility approved by the Authority and entered into in connection with the Bonds of the Authority.
“Financing Facility Payment Obligations” means all payment and reimbursement obligations (without duplicating any Bond Payment Obligations) of the Authority to a Financing Facility Provider in connection with any Financing Facility.
“Financing Facility Provider” means the issuer or provider of a Financing Facility, including a Swap Provider, a Credit Facility Provider and a Liquidity Facility Provider.
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“Fiscal Year” means the fiscal year of the Commonwealth which presently includes the twelve (12) month period commencing July 1 of each year and ending on the succeeding June 30.
“Fitch” means Fitch Inc., its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Authority by notice to the other Interested Parties.
“Holder” or “Bondholder,” when used with respect to a Bond, means the Person in whose name such Bond is registered. A Credit Facility Provider or Liquidity Facility Provider which owns Bonds by purchase or is subrogated to the rights of Bondholders is a Bondholder for purposes of the Indenture.
“Interest Payment Date” means (1) with respect to the 2013A Bonds, each of the Interest Payments Dates described in the forepart of this Official Statement and (2) with respect to other series of Bonds, as set forth in the Initial Energy Indenture or the Supplemental Indenture, as applicable, authorizing the issuance thereof.
“Interested Parties” means the Authority, the Trustee and any Financing Facility Provider.
“Investment Agreement” means an investment agreement with (i) a commercial bank or trust company or a national banking association in any case having a capital stock and surplus of more than $100,000,000, or (ii) an insurance company with the highest rating provided by A.M. Best Company, or (iii) a corporation; provided that the credit of such commercial bank or trust company or national banking association, insurance company or corporation, as the case may be, is rated (or, in the case of a corporation, whose obligations thereunder are guaranteed by a corporation whose credit is rated) not lower than the rating category of any two Rating Agencies then rating the Bonds required to maintain the rating then in effect or to obtain the rating to be obtained on the Bonds in respect of which such Investment Agreement is entered into, which agreement provides for the investment of funds held in the Funds and Accounts, which funds shall be collateralized by at least one hundred two (102%) percent in principal amount of Investment Securities, as the same may be amended from time to time.
“Investment Securities” means and includes any of the following securities, if and to the extent the same are at the time legal for investment of the Authority’s funds:
(i) Defeasance Securities;
(ii) Negotiable or non-negotiable interest bearing deposits (or other deposit arrangements) issued by any bank, trust company or national banking association, including the Trustee , which deposits shall be continuously secured or collateralized by obligations described in subparagraph (i) of this definition, which shall have a market value at all times at least equal to the principal amount of such certificates of deposit and shall be lodged with the Trustee, as custodian, by the bank, trust company or national banking association issuing such deposits;
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(iii) Uncollateralized negotiable or non-negotiable certificates of deposit (or other time deposit arrangements) issued by any bank, trust company or national banking association, the unsecured obligations of which are rated, at the time of purchase, in one of the two highest Rating Categories, by any two Rating Agencies;
(iv) Repurchase agreements collateralized by obligations described in subparagraphs (i), (ii) or (iii) of this definition with any registered broker/dealer subject to the Securities Investors’ Protection Corporation jurisdiction, which has an uninsured, unsecured and unguaranteed obligation rated in one of the two highest Rating Categories, by any two Rating Agencies, or any commercial bank with the above ratings, provided: (a) a master repurchase agreement or specific written repurchase agreement governs the transaction, which characterizes the transaction as a purchase and sale of securities, (b) the securities are held, free and clear of any lien, by the Trustee or an independent third party acting solely as agent for the Trustee, and such third party is (i) a Federal Reserve Bank, (ii) a bank which is a member of the Federal Deposit Insurance Corporation and which has combined capital, surplus and undivided profits of not less than $75,000,000 or (iii) a bank approved in writing for such purpose by each Financing Facility Provider, if any, and the Trustee shall have received written confirmation from such third party that it holds such securities, free and clear of any lien, as agent for the Trustee; (c) a perfected first security interest under the Uniform Commercial Code, or book entry procedures prescribed at 31 CFR 306.1 et seq. or 31 CFR 350.0 et seq. or a successor provision in such securities is created for the benefit of the Trustee; (d) the repurchase agreement has a term of six months or less, or the Trustee or its agent will value the collateral securities no less frequently than weekly and will liquidate the collateral securities if any deficiency in the required collateral percentage is not restored within two Business Days of such valuation; (e) the repurchase agreement matures on or before a Payment Date (or, if held in a Fund other than the Debt Service Fund, other appropriate liquidation period); and (f) the fair market value of the securities in relation to the amount of the repurchase obligation is equal to the collateral levels established by a Rating Agency for the rating assigned by the Rating Agency to the seller.
(v) Banker’s acceptances, eurodollar deposits and certificates of deposit (in addition to the certificates of deposit provided for by subparagraphs (ii) and (iii) above) of the domestic branches of foreign banks having a capital and surplus of $1,000,000,000 or more, or any bank or trust company organized under the laws of the United States of America or Canada, or any state or province thereof, having capital and surplus, in the amount of $1,000,000,000; provided that the aggregate maturity value of all such banker’s acceptances and certificates of deposit held at any time as investments of Funds under the Indenture with respect to any particular bank, trust company, or national association shall not exceed 5% of its capital and surplus; and provided further than any such bank, trust company, or national association shall be rated in one of the two highest Rating Categories, by any two Rating Agencies;
(vi) Other obligations of the United States of America or any agency thereof which may then be purchased with funds belonging to the Commonwealth or which are legal investments for savings banks in the Commonwealth of Pennsylvania;
(vii) Obligations of any state, commonwealth or possession of the United States or a political subdivision thereof or any agency or instrumentality of such a state, commonwealth, possession or political subdivision, provided that at the time of their purchase
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such obligations are rated in either of the two highest Rating Categories, by any two Rating Agencies then rating the Bonds;
(viii) Commercial paper with a maturity date not in excess of 270 days rated by the Rating Agencies at least equal to the rating assigned by the Rating Agencies to the applicable Series of Bonds and in no event lower than the “A” Rating Category established by a Rating Agency (which may include subcategories indicated by plus or minus or by numbers) at the time of such investment, issued by an entity incorporated under the laws of the United States or any state thereof;
(ix) Shares of a diversified open-end management investment company as defined in the Investment Company Act of 1940, which is a money market fund, which is then rated in any of the three highest Rating Categories by at least one Rating Agency which is then rating the Bonds or money market accounts of the Trustee or any bank or trust company organized under the laws of the United States or any state thereof which has a combined capital and surplus of not less than $75,000,000;
(x) Investment contracts (a) providing for the future purchase of securities of the type described in (i), (ii), (iii) and (vii) above, which contracts have been approved for sale by a national securities exchange and all regulatory authorities having jurisdiction or (b) the obligor under which or the guarantor thereof shall have a credit rating such that its long term debt is rated in one of the two highest Rating Categories, by any two Rating Agencies then rating the Bonds;
(xi) Investment Agreements;
(xii) Investments by the Commonwealth Department of Treasury pursuant to the Memorandum of Understanding with the Authority dated December 1, 2006, or any successor agreement providing for investments pursuant to the Commonwealth Financing Authority Investment Policy, or any investment in the Pennsylvania Invest Daily fund; and
(xiii) Any other investment authorized in writing by all Credit Facility Providers.
“Liquidity Facility” means a standby bond purchase agreement, letter of credit or other liquidity facility issued by a commercial bank, savings institution, insurer or other institution which, by its terms, shall provide for the payment of the purchase price of a Series of Bonds tendered and not remarketed; such Liquidity Facility may be part of, or separate from, any other Financing Facility supporting the Bonds.
“Liquidity Facility Provider” means the issuer of a Liquidity Facility.
“Maturity Date” means the maturity dates of the 2013A Bonds set forth on the inside front cover of this Official Statement, or the maturity dates set for other Bonds in the Initial Energy Indenture or a Supplemental Indenture, as applicable.
“Moody’s” means Moody’s Investors Service, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a
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securities rating agency, any other nationally recognized securities rating agency designated by the Authority by notice to the other Interested Parties.
“Obligations” means Bond Payment Obligations and Financing Facility Payment Obligations.
“Opinion of Counsel” means a written opinion of counsel (who may be counsel for the Authority) selected by the Authority and not objected to by the Trustee, the Credit Facility Provider (if any) or the Liquidity Facility Provider (if any).
“Outstanding,” when used as of any particular time with reference to Bonds, means (subject to the provisions of the Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except: (1) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Bonds with respect to which all liability of the Authority shall have been discharged; and (3) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture.
“Parity Financing Facility Payment Obligations” means all Financing Facility Payment Obligations other than those Financing Facility Payment Obligations which are expressly subordinate to other Financing Facility Payment Obligations and Bond Payment Obligations by their terms.
“Parity Obligation” means all Bond Payment Obligations and all Parity Financing Facility Payment Obligations.
“Payment Date” shall mean each date on which an Obligation shall be due and owing.
“Person” means an individual, corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.
“Principal Payment Date” means, with respect to a Bond, the date on which principal of such Bond becomes due and payable, either by maturity, redemption, acceleration or otherwise.
“Prior Bonds” means the “Prior Energy Bonds” as defined in the front portion of this Official Statement.
“Project” means the funding of the Alternative Energy Development Program established in the Alternative Energy Act.
“Project Costs” means those uses of the proceeds of Bonds as the Authority may deem necessary and desirable in accordance with the Act and the Alternative Energy Act including the use for any of the following: (i) making grants; (ii) making and purchasing loans, mortgages, security interests or loan participations and paying obligations related to guarantees; (iii) paying incidental expenses in connection with activity under (i) and (ii) above, including
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administrative costs of the Authority and the Department; (iv) paying expenses of authorizing and issuing the Bonds, including, but not limited to, the payment of any amounts to the Rebate Fund; (v) paying principal, redemption or purchase price and interest on Bonds; and (vi) funding reserves.
“Project Fund” means the fund by that name established pursuant to the Indenture.
“Rating Agency” means S&P, Moody’s and Fitch.
“Rating Category” means one of the general rating categories of the Rating Agencies without regard to any refinement or graduation of such rating category by numerical modifier or otherwise.
“Rebate Fund” means the fund by that name established pursuant to the Indenture.
“Record Date” means (1) with respect to the 2013A Bonds, the Record Date described in the forepart of this Official Statement and (2) with respect to any other series of Bonds, as set forth in the Initial Energy Indenture or the Supplemental Indenture, as applicable, authorizing the issuance thereof.
“Redemption Price” means, with respect to any Bond (or portion thereof), the principal amount of such Bond (or portion) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and the Indenture.
“Required Stated Amount” means, at any time of calculation with respect to any Series of Bonds, an amount equal to the aggregate principal amount of all Bonds of such Series then Outstanding together with interest accruing thereon (assuming an annual rate of interest equal to the maximum rate payable thereon) for the period specified in a Certificate of the Authority to be the minimum period specified by the Rating Agencies then rating the Bonds of such Series as necessary to maintain, in the case of the Liquidity Facility, the short-term rating of the Bonds of such Series, or, in the case of the Credit Facility, the long-term rating of the Bonds of such Series.
“Revenue Fund” means the Revenue Fund established under the Indenture.
“Revenues” means all amounts received and to be received from the Department by the Authority or the Trustee for the account of the Authority pursuant or with respect to the Service Agreement other than the Service Fee Component constituting Administrative Expenses (as those terms are defined in the Service Agreement) under the Service Agreement and amounts required to be deposited into the Rebate Fund.
“Revolving Fund” means accounts established under the Indenture to receive repayments of loans made from the proceeds of any Bonds (or the proceeds thereof).
“S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., its successors and their assigns, or, if such division or corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other
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nationally recognized securities rating agency designated by the Authority by notice to the other Interested Parties.
“Securities Depository” means The Depository Trust Company and its successors and assigns, or any other securities depository, which agrees to follow the procedures required to be followed by such securities depository in connection with the Bonds.
“Securities Depository Participant” means a member of, or participant in, the Securities Depository.
“Series,” when used with respect to the Bonds, means all the Bonds designated as being of the same series, authenticated and delivered in a simultaneous transaction, and any Bonds thereafter authenticated and delivered upon a transfer or exchange or in lieu of or in substitution for such Bonds as provided in the Indenture.
“Service Agreement” means the Energy Service Agreement described in the forepart of the Official Statement, as it may be further supplemented, modified or amended in accordance with the terms thereof and of the Indenture.
“Special Record Date” means the date established by the Trustee pursuant to the Indenture as a record date for the payment of defaulted interest on the Bonds.
“Supplemental Indenture” means any indenture duly authorized and entered into between the Authority and the Trustee, supplementing, modifying or amending the Indenture; but only if and to the extent that such Supplemental Indenture is specifically authorized under the Indenture.
“Surplus Fund” means the Surplus Fund established in the Indenture.
“Swap” or “Swap Agreement” means any agreement between the Authority and a Swap Provider confirming a transaction which is a rate swap transaction, basis swap, forward rate transaction, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, corridor transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of these transactions.
“Swap Payment Obligations” means, for any period of time, all net amounts payable by the Authority (including Swap Termination Payments payable by the Authority) under any Swap.
“Swap Provider” means the Authority’s or the Trustee’s counterparty under a Swap Agreement.
“Swap Revenues” means all amounts received by the Authority or the Trustee pursuant to any Swap, including without limitation any Swap Termination Payment.
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“Swap Termination Payment” means, with respect to any Swap, any settlement amount payable by the applicable Swap Provider or the Authority by reason or on account of the early termination of such Swap. The term “Swap Termination Payment” shall not include net unpaid amounts which would have been payable by the Swap Provider or the Authority pursuant to the terms of the applicable Swap irrespective of the early termination of such Swap.
“Tax Certificate” means the Tax Certificate delivered by the Authority at the time of issuance and delivery of a Series of the Bonds, as the same may be amended or supplemented in accordance with its terms.
“Tax-Exempt” means, with respect to any Bond, that Bond Counsel has delivered an opinion that the interest thereon is not includable in gross income for federal income tax purposes.
“Trust Estate” shall have the meaning set forth under “Trust Estate” below.
“Trustee” means The Bank of New York Mellon Trust Company, N.A., a national banking association duly organized and existing under the laws of the United States of America, having a corporate trust office in Philadelphia, Pennsylvania, or its successor, as Trustee under the Indenture.
Trust Estate
Under the Indenture, the Authority has pledged and assigned to the Trustee and granted to the Trustee a security interest in all right, title and interest of the Authority in and to (i) all Revenues, (ii) all monies deposited into accounts or funds created by the Indenture and held by or on behalf of the Trustee (other than the Rebate Fund and any Revolving Fund), (iii) all payments received by the Authority or the Trustee pursuant to Financing Facilities, (iv) all investment earnings on monies held in accounts and funds established by the Indenture, other than the Rebate Fund, and (v) proceeds of the foregoing (collectively, the “Trust Estate”).
The Trust Estate is held by the Trustee for the equal and proportionate benefit and security of all Obligations, all of which, regardless of the time or times of their delivery or maturity, shall be of equal rank without preference, priority or distinction as to lien or otherwise of any Obligation over any other Obligation, except (a) as otherwise permitted by or provided for in the Indenture, (b) for Financing Facility Payment Obligations which do not constitute Parity Financing Facility Payment Obligations, which shall be expressly subordinate to other Obligations and (c) that any funds held by the Trustee (i) for the payment of specific Bonds or Financing Facility Payment Obligations which are deemed to have been paid under the Indenture or (ii) otherwise to provide additional security or an additional source of payment for specific Bonds or Obligations, shall be held and used only to pay or provide security for the Bonds or Obligations for which such fund is held and shall not be held as security on a parity for all Obligations.
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Additional Bonds
The Authority may issue Additional Bonds from time to time for the purpose of funding Project Costs or for the purpose of refunding part or all of the outstanding Bonds of any Series. Such Additional Bonds may be issued and the Trustee shall authenticate and deliver such Additional Bonds when there have been filed with the Trustee, among other things, the following: (A) a certified resolution of the Authority authorizing the execution and delivery of a Supplemental Indenture providing for the provisions of, and the issuance, sale, execution and delivery of, such Additional Bonds; (B) a Supplemental Indenture and an amendment to the Service Agreement which extends the Department’s obligation to make payments thereunder to such Additional Bonds; (C) an Opinion of Counsel, addressed to the Authority and to the Trustee, which includes opinions to the effect that (1) the issuance of the Additional Bonds is permitted under the Indenture, the Act and the Alternative Energy Act and (2) each of the Supplemental Indenture and the Additional Bonds has been authorized, executed and delivered and is a valid, binding and enforceable obligation of the Authority; (D) a Certificate of the Authority that the Authority is not in default under the Indenture; and (E) evidence satisfactory to the Trustee that, upon issuance of the Additional Bonds, an amount sufficient to satisfy the Debt Service Reserve Requirement, if any, will be on deposit in the Debt Service Reserve Fund.
Application of Proceeds
The Trustee shall deposit all of the proceeds of Bonds into the Clearing Fund created under the Indenture and, as directed in a Closing Certificate, shall pay from the Clearing Fund all Costs of Issuance of the Bonds and shall make such transfers from the Clearing Fund to the Project Fund, the Debt Service Fund and the Debt Service Reserve Fund (if required) as directed in such Closing Certificate.
Establishment and Application of Project Fund
The moneys in the Project Fund established by the Trustee under the Indenture shall be withdrawn by the Trustee and paid to the Authority for application to Project Costs. In connection with the issuance of the 2013A Bonds, the Trustee shall establish a separate account entitled “Series 2013A-1 Bond Account of the Project Fund” for the proceeds of the 2013A-1 Bonds and a separate account entitled “Series 2013A-2 Bond Account of the Project Fund” for the proceeds of the 2013A-2 Bonds. Payments from the Project Fund shall be made upon requisition by the Authority.
When the portion of the Project funded with the proceeds of the 2013A-1 Bonds shall have been completed or when the Authority shall have decided not to pay any further Project Costs from the account in the Project Fund established for the 2013A-1 Bonds or when the portion of the Project funded with the proceeds of the 2013A-2 Bonds shall have been completed or when the Authority shall have decided not to pay any further Project Costs from the account in the Project Fund established for the 2013A-2 Bonds, the Authority shall deliver to the Trustee a Certificate stating such fact and requesting that such account be closed. Upon the receipt of such Certificate, the Trustee shall, as directed by said Certificate, transfer any remaining balance in: (i) the 2013A-1 Bond Account of the Project Fund as directed by the Authority; and (ii) the Series 2013A-2 Bond Account of the Project Fund to the Debt Service
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Fund for the optional redemption of 2013A-2 Bonds unless the Authority delivers to the Trustee a Favorable Opinion of Bond Counsel with respect to a different application of such balance. Upon such transfer, such account shall be closed.
Revenue Fund
The Trustee shall deposit in the Revenue Fund established under the Indenture all Revenues and any other amounts received by the Trustee from any source, including Swap Revenues and other amounts received pursuant to Financing Facilities, unless otherwise expressly provided in the Indenture, for deposit to the Revenue Fund when and as such Revenues and other amounts are received.
All amounts in the Revenue Fund shall be withdrawn by the Trustee and deposited into the following funds in the following order of priority except as provided with respect to the Rebate Fund:
First, the Trustee shall withdraw from the Revenue Fund and deposit into the Debt Service Fund on or before each Payment Date the amounts which, together with moneys already on deposit therein, are sufficient to make the payments described in the first paragraph under “Debt Service Fund” below.
Second, the Trustee shall withdraw from the Revenue Fund and deposit into the Debt Service Reserve Fund on or before June 1 of each year the amount, if any, required to make the amount on deposit in the Debt Service Reserve Fund equal to the Debt Service Reserve Requirement for each Series of Bonds subject to the Debt Service Reserve Requirement.
Third, the Trustee shall withdraw from the Revenue Fund the amounts necessary to pay any Administrative Fees and Expenses due and owing on any Payment Date and shall pay the same.
Fourth, the Trustee shall withdraw from the Revenue Fund and deposit into the Debt Service Fund on each Payment Date the amount which, together with moneys already on deposit, is sufficient to pay any Financing Facility Payment Obligations which are not Parity Financing Facility Payment Obligations but which are then due and owing.
Fifth, the Trustee shall withdraw from the Revenue Fund and deposit into the Surplus Fund on the day following the last scheduled Payment Date preceding June 30 in each year, any amounts remaining in the Revenue Fund.
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Debt Service Fund
The Trustee shall establish, maintain and hold in trust separate accounts in the Debt Service Fund including accounts designated as the “2013A-1 Bonds Subaccount” and “2013A-2 Bonds Subaccount”. Moneys in the Debt Service Fund Accounts shall be held until applied as provided in the Indenture. The Trustee shall pay out of the related Account of the Debt Service Fund (1) on or before each Payment Date for any of the Bonds, any Bond Obligation Payment due and owing on such Payment Date and any other unpaid Bond Obligation Payment; (2) on or before each Payment Date for any Financing Facility, the amount of any Parity Financing Facility Payment Obligation due and owing on such Payment Date; (3) on or before each Payment Date, any amounts required to be deposited in the related Account of the Rebate Fund.
The Trustee shall pay out of the related Account of the Debt Service Fund on any Payment Date the amount of any Financing Facility Payments which are not Parity Financing Facility Payment Obligations but which are then due and owing after payment of any amounts due and owing on the same date.
At any time prior to giving notice of mandatory sinking fund redemption, the Trustee shall, upon direction of the Authority, apply such moneys to the purchase of Bonds of the appropriate Series and maturity at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Debt Service Fund) as the Authority may direct, except that the purchase price (excluding accrued interest but including brokerage and all other charges) shall not exceed the par amount of such Bonds. If, prior to giving notice of a mandatory sinking fund redemption, the Trustee has purchased Bonds with moneys in the Debt Service Fund, such Bonds so purchased or deposited or redeemed shall be applied, to the extent of the full principal amount thereof, to reduce said mandatory sinking fund redemption. All Bonds purchased or deposited pursuant to this paragraph shall be cancelled and destroyed by the Trustee. All Bonds purchased from the Debt Service Fund or deposited by the Authority with the Trustee shall be allocated first to the next succeeding mandatory sinking fund redemption, then to the remaining mandatory sinking fund redemptions as selected by the Authority.
Debt Service Reserve Fund
There will be no deposit in the Debt Service Reserve Fund established under the Indenture to secure the 2013A Bonds. The Trustee may set up separate accounts in the Debt Service Reserve Fund for the proceeds of a specified Series of Bonds and the applicable Supplemental Indenture shall specify whether or not the account funded with proceeds of the Series of Bonds issued thereunder is to secure solely such Series or also is to secure other Series of Bonds which have funded the Debt Service Reserve Fund and/or other Parity Obligations. Bonds are not required to be secured by the Debt Service Reserve Fund.
Surplus Fund
The Trustee shall withdraw from the Surplus Fund established under the Indenture and deposit into the Revenue Fund without direction of the Authority any amounts
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required for the Trustee to make the necessary deposits from the Revenue Fund into the Debt Service Fund or the Debt Service Reserve Fund. Upon direction of the Authority, the Trustee shall apply moneys held in the Surplus Fund to any one or more of the following purposes: (1) the purchase or redemption of any Bonds on market-rate terms and the payment of expenses of any such purchase or redemption; (2) payments into the Rebate Fund; and (3) payments into the account of the Project Fund directed by the Authority.
2013A-2 Rebate Fund
The Trustee shall establish under the Indenture a 2013A-2 Rebate Fund. Subject to the provisions of the Indenture, all money at any time deposited in the 2013A-2 Rebate Fund established under the Indenture shall be held by the Trustee in trust on account of the 2013A-2 Bonds, to the extent required to satisfy the Rebate Amount (as defined in the Tax Certificate) or to make yield reduction payments, for payment to the federal government of the United States of America. The Authority, the Holder of any Bonds or any Financing Facility Provider shall have no rights in or claim to such money.
Investment of Moneys
All moneys in any of the funds and accounts established pursuant to the Indenture shall be invested by the Trustee, upon the written direction of the Authority, solely in Investment Securities. Investment Securities shall be purchased at such prices as the Authority may direct. In the absence of directions from the Authority, the Trustee shall invest in the Pennsylvania Invest Daily fund or its successor or, if not available, investments by the Commonwealth of Pennsylvania Department of Treasury pursuant to the Memorandum of Understanding with the Authority dated December 1, 2006, or any successor agreement providing for investments pursuant to the Commonwealth Financing Authority Investment Policy. Moneys in all funds and accounts shall be invested in Investment Securities maturing not later than the date on which it is estimated that such moneys will be required for the purposes specified in the Indenture. Investment Securities purchased under a repurchase agreement may be deemed to mature on the date or dates on which the Trustee may deliver such Investment Securities for repurchase under such agreement.
All interest, profits and other income received from the investment of moneys in any fund or account established pursuant to the Indenture shall be deposited when received in such fund or account except that earnings on any portion of the Debt Service Reserve Fund which (A) is allocable to any Bonds which are not Tax-Exempt, shall be deposited (1) into the Project Fund for such Bonds for as long as such Project Fund is open and (2) into the Revenue Fund once such Project Fund has been closed, and (B) is allocable to any Bonds which are Tax-Exempt, shall be deposited into the Debt Service Fund. Notwithstanding anything to the contrary contained in this paragraph, an amount of interest received with respect to any Investment Security equal to the amount of accrued interest, if any, paid as part of the purchase price of such Investment Security shall be credited to the fund or account for the credit of which such Investment Security was acquired.
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Moneys held in the Debt Service Fund for the redemption of Bonds shall be invested solely in Defeasance Securities, maturing in such amounts and at such times as are required for such redemption.
Financing Facilities
The Authority is permitted to enter into various Credit Facilities and Liquidity Facilities with respect to Bonds which will be secured by the Trust Estate as set forth in the Indenture.
The Authority may enter into one or more Swap Agreements which shall be entitled to the benefits contemplated for Swap Agreements under the Indenture upon compliance with the requirements set forth in the Indenture. Unless expressly subordinated, Swap Termination Payments owed by the Authority shall be Parity Financing Facility Payment Obligations which shall be due and owing on the first Payment Date in (A) the following fiscal year of the Commonwealth, if the Swap Termination Payment results from a termination or similar event that occurs more than six months prior to the commencement of such fiscal year or (B) the second following fiscal year of the Commonwealth, if the Swap Termination Payment results from a termination or similar event that occurs six months or less prior to the commencement of a fiscal year of the Commonwealth.
Encumbrances
The Authority shall not create, or permit the creation of, any pledge, lien, charge or other encumbrance upon the Revenues and other assets pledged or assigned under the Indenture while any of the Bonds or Financing Facilities are Outstanding, except the pledge and assignment created by the Indenture. Subject to this limitation, the Authority expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, including other programs under the Act, and reserves the right to issue other obligations for such purposes.
Tax Covenants
The Authority shall at all times do and perform all acts and things permitted by law and the Indenture that are necessary or desirable in order to assure that interest paid on any Bonds issued as Tax-Exempt will be excluded from gross income for purposes of federal income taxes and shall take no action that would result in such interest not being excluded from gross income for federal income taxes.
Service Agreement
The Authority agrees to comply with the terms of the Service Agreement, including working with the Department to provide the necessary notices to the Commonwealth. The Authority agrees to provide promptly to the Trustee a copy of the “Annual Service Fee Estimate” provided by the Department to the Commonwealth pursuant to the Service Agreement. In the event the Trustee has not received evidence of the provision of such Estimate by October 5 of each year (or, if the Commonwealth fiscal year changes, 5 days after such Estimate is required to be delivered), then it promptly shall make inquiry with respect to the status of the provision of such Estimate. Subject to the provisions of the Indenture with respect to the control of remedial
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proceedings by the Credit Facility Provider (if any), the Trustee shall seek to cause the Department to perform all duties imposed upon it pursuant to the Service Agreement. In addition, the Trustee shall promptly collect all amounts due from the Department pursuant to the Service Agreement.
The Authority may amend, modify or terminate any of the terms of the Service Agreement: (1) without the consent of the Trustee, any Bondholders or any Financing Facility Provider if such amendment, modification or termination will not materially adversely affect the interests of the Bondholders or the Financing Facility Providers; and (2) with the written consent of (i) the Financing Facility Provider (if any) (provided that the Financing Facility is then in effect or any amounts are owing to the Financing Facility Provider and the Financing Facility Provider (if any) is not in default under its payment obligations under the Financing Facility) and (ii) the Holders of a majority in principal amount of the Bonds then Outstanding (unless the Indenture or the applicable Supplemental Indenture provides that such Financing Facility Provider may vote on behalf of the Holders of the Bonds to which its Financing Facility relates). No such amendment, modification or termination shall reduce the amounts to be paid to the Authority or the Trustee by the Department pursuant to the Service Agreement below the amounts necessary to make payments under the Indenture, or extend the time for making such payments, without the written consent of all of the Holders of all Obligations then Outstanding. In connection with any amendment, modification or termination of the terms of the Service Agreement, the Authority shall cause to be delivered to the Trustee a Favorable Opinion of Bond Counsel.
Events of Default
Any one or more of the following events shall be Events of Default:
(A) default in the due and punctual payment of any Bond Payment Obligation when and as the same shall become due and payable;
(B) default in the due and punctual payment of any Parity Financing Facility Payment Obligation when and as the same shall become due and payable;
(C) default by the Authority in the observance of any of the other covenants, agreements or conditions on its part in the Indenture or in the Bonds contained (including default in the making of any payment not specified in paragraph (A) or (B) above), if such default shall have continued for a period of 30 days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Authority by the Trustee, or to the Authority and the Trustee by the Credit Facility Provider (if any) or the Holders of not less than 25% in aggregate principal amount of the Bonds at the time Outstanding;
(D) the Service Agreement for any reason shall cease to be valid and binding upon the Department or shall be declared to be null and void as a result of an act of the Legislature or a final, nonappealable judgment or order of a court or governmental agency or authority having jurisdiction over the Department; or in a judicial proceeding or any other official action commenced by the Department, the validity or enforceability of the Service
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Agreement shall be contested by the Department or the Department shall deny that it has any or further liability or obligation under the Service Agreement;
(E) receipt by the Trustee of notice from the Credit Facility Provider (if any) that an Event of Default (as defined in the Financing Facility) has occurred under a Credit Facility and requesting acceleration of the Bonds; or
(F) the Authority shall commence an action in bankruptcy or otherwise consent to or accept a plan for relief under federal or state bankruptcy laws.
NOTWITHSTANDING ANYTHING CONTAINED IN THE PROVISIONS OF THE INDENTURE DESCRIBED UNDER THIS HEADING TO THE CONTRARY, THE OCCURRENCE OF AN EVENT OF NON-APPROPRIATION SHALL NOT CONSTITUTE AN EVENT OF DEFAULT AS LONG AS ALL BOND PAYMENT OBLIGATIONS (OTHER THAN WITH RESPECT TO BONDS HELD BY FINANCING FACILITY PROVIDERS) ARE PAID WHEN DUE.
Acceleration of Maturities
During the continuance of an Event of Default described in paragraph (A), (B), (C) (D), or (F) under “Events of Default” above, unless the principal of all the Bonds shall have already become due and payable, the Trustee, upon the written request of the Credit Facility Provider (if any) or the Holders of not less than 66-2/3% in aggregate principal amount of the Bonds at the time Outstanding with the consent of the Credit Facility Provider (if any), or upon the occurrence of an Event of Default described in paragraph (E) under “Events of Default” above, shall, promptly upon such occurrence, by notice in writing to the Authority, the Credit Facility Provider (if any) and the Liquidity Facility Provider (if any), declare the principal of all the Bonds then Outstanding and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in the Indenture or in the Bonds contained to the contrary notwithstanding. Upon any such declaration, the Trustee shall promptly draw upon any then existing Credit Facility in accordance with the terms thereof and apply the amount so drawn to pay any Bond Payment Obligation on the Bonds enhanced by such Credit Facility so declared to be due and payable. Interest on the Bonds shall cease to accrue as of the date of payment thereof. The Trustee, as promptly as feasible following acceleration of the Bonds, shall notify the Bondholders of the date of acceleration and the cessation of accrual of interest on the Bonds in the same manner as for a notice of redemption; provided, however, that failure to give such notice shall not affect the acceleration of the Bonds.
The preceding paragraph, however, is subject to the condition that if, at any time after the principal of the Bonds shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, and before the Credit Facility has been drawn upon in accordance with its terms and honored, there shall have been deposited with the Trustee a sum sufficient to pay all the principal of the Bonds matured prior to such declaration and all matured installments of interest (if any) upon all the Bonds, with interest on such overdue installments of principal, and the reasonable fees and expenses of the Trustee, including reasonable fees and expenses of its
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attorneys, and any and all other defaults known to the Trustee (other than a Bond Payment Obligation due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee and the Credit Facility Provider (if any) or provision deemed by the Trustee and the Credit Facility Provider (if any) to be adequate shall have been made therefor, then, and in every such case, the Credit Facility Provider (if any) or the Holders of at least a majority in aggregate principal amount of the Bonds then Outstanding, with the written consent of the Credit Facility Provider (if any) and confirmation that the Credit Facility (if any) has been reinstated to the Required Stated Amount, by written notice to the Authority and to the Trustee, may, on behalf of the Holders of all the Bonds, rescind and annul such declaration and its consequences and waive such default; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon. Notwithstanding any other provision of the Indenture except as provided in the following sentence, the Trustee may not exercise any remedy in the event of a default under paragraph (A), (B), (C), (D),or (F) described under “Events of Default” above without the written consent of the Credit Facility Provider (if any), so long as the Credit Facility is in effect and the Credit Facility Provider (if any) is not in default under its payment obligations under the Credit Facility. The Trustee may exercise any and all remedies under the Indenture to collect any fees or expenses due from the Authority to the Trustee without obtaining the consent of the Credit Facility Provider (if any); provided that the Trustee shall first provide written notice to the Credit Facility Provider (if any) of its intent to exercise such remedies and provide the Credit Facility Provider (if any) with an opportunity to cure any failure of the Authority with respect to such fees, expenses and indemnification prior to exercising any such remedy.
Subject to the provisions of the Indenture, if an Event of Default shall occur and be continuing, the Trustee in its discretion may, and upon the written request of the Credit Facility Provider (if any) (if the Credit Facility is in effect and such Credit Facility Provider is not in default under its payment obligations under the Credit Facility) or the Holders of two-thirds in principal amount of the Bonds then Outstanding (with the consent of the Credit Facility Provider, if any, if the Credit Facility is in effect and such Credit Facility Provider is not in default under its payment obligations under the Credit Facility) and upon being indemnified to its satisfaction therefor shall, proceed to protect or enforce its rights or the rights of the Holders of Bonds or under the Indenture or the Service Agreement by a suit in equity or action at law, either for the specific performance of any covenant or agreement contained in the Indenture or the Service Agreement, or in aid of the execution of any power granted in the Indenture or the Service Agreement, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Trustee shall deem most effectual in support of any of its rights or duties under the Indenture.
Application of Revenues and Other Funds After Default
If an Event of Default shall occur and be continuing, all Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture (other than payments received from the Credit Facility Provider (if any) and moneys required to be deposited in the Rebate Fund and subject to the requirements of the Indenture relating to the use of moneys held for particular Bonds) shall be applied by the Trustee as follows and in the following order: (A) to the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Holders of the Bonds and payment of reasonable and actual charges
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and expenses of the Trustee (including reasonable and actual fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under the Indenture including, but not limited to, its rights with respect to the Service Agreement; (B) to any Parity Obligation then due and unpaid (upon presentation of any Bonds to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid), and, if the amount available shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of one such Parity Obligation over another such Parity Obligation, or of any installment of one such Parity Obligation over any other installment of such Parity Obligation, according to the amounts due respectively therefor, to the persons entitled thereto without any discrimination or preference; and (C) to any Financing Facility Payment Obligation not constituting a Parity Financing Facility Payment Obligation then due and unpaid, and, if the amount available shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of one such Financing Facility Payment Obligation over another such Financing Facility Payment Obligation, or of any installment of one such Financing Facility Payment Obligation over any other installment of such Financing Facility Payment Obligation, according to the amounts due respectively therefor, to the persons entitled thereto without any discrimination or preference.
Trustee to Represent Bondholders
The Trustee is irrevocably appointed (and the successive respective Holders of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Trustee) as trustee and true and lawful attorney in fact of the Holders of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Holders under the provisions of the Bonds, the Indenture and applicable provisions of any other law. Upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Trustee to represent the Bondholders, the Trustee in its discretion may, and upon the written request of the Credit Facility Provider (if any) or the Holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding, with the consent of the Credit Facility Provider (if any), and upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of such Holders and the Credit Facility Provider (if any) by such appropriate action, suit, mandamus or other proceedings as it shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained in the Indenture, or in aid of the execution of any power granted in the Indenture, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Trustee, in the Credit Facility Provider (if any) or in such Holders and the Credit Facility Provider (if any) under the Indenture, the Act or any other law; and upon instituting such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Trust Estate, pending such proceedings. All rights of action under the Indenture or the Bonds or otherwise may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in the name of the Trustee for the benefit and protection of all the Holders of such Bonds, subject to the provisions of the Indenture.
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Credit Facility Provider’s and Bondholders’ Direction of Proceedings
Anything in the Indenture to the contrary notwithstanding, the Credit Facility Provider (if any) or the Holders of a majority in aggregate principal amount of the Bonds then Outstanding if there is no Credit Facility Provider, shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method of conducting all remedial proceedings taken by the Trustee under the Indenture, including, but not limited to, proceedings with respect to the Service Agreement, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Indenture, and that the Trustee shall have the right to decline to follow any such direction that in the opinion of the Trustee would be unjustly prejudicial to Bondholders not parties to such direction.
Limitation on Bondholders’ Right to Sue
No Holder of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Indenture or any other applicable law with respect to such Bond, unless (1) such Holder shall have given to the Trustee written notice of the occurrence of an Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers granted by the Indenture or to institute such suit, action or proceeding in its own name; (3) such Holder or said Holders shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (4) the Trustee shall have refused or omitted to comply with such request for a period of 60 days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee.
Such notification, request, tender of indemnity and refusal or omission are declared, in every case, to be conditions precedent to the exercise by any Holder of Bonds of any remedy under the Indenture or under law; it being understood and intended that no one or more Holders of Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Indenture or the rights of any other Holders of Bonds, or to enforce any right under the Indenture or other applicable law with respect to the Bonds, except in the manner provided in the Indenture, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner provided in the Indenture and for the benefit and protection of all Holders of the Outstanding Bonds, subject to the provisions of the Indenture.
Absolute Obligation of Authority
Nothing in the Indenture or in the Bonds shall affect or impair the obligation of the Authority, which is absolute and unconditional, to pay any Bond Payment Obligation on the Bonds to the respective Holders of the Bonds at their respective dates of maturity, or upon call for redemption, as provided in the Indenture, but only out of the Trust Estate, or affect or impair the right of such Holders, which is also absolute and unconditional, to enforce such payment by virtue of the contract embodied in the Bonds.
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Termination of Proceedings
In case any proceedings taken by the Trustee, the Credit Facility Provider (if any) or any one or more Bondholders on account of any Event of Default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee, the Credit Facility Provider (if any) or the Bondholders, then in every such case the Authority, the Liquidity Facility Provider (if any), the Trustee, the Credit Facility Provider (if any) and the Bondholders, subject to any determination in such proceedings, shall be restored to their former positions and rights under the Indenture, severally and respectively, and all rights, remedies, powers and duties of the Authority, the Liquidity Facility Provider (if any), the Trustee, the Credit Facility Provider (if any) and the Bondholders shall continue as though no such proceedings had been taken.
Remedies Not Exclusive
No remedy herein conferred upon or reserved to the Trustee, the Liquidity Facility Provider (if any) or the Credit Facility Provider (if any) or to the Holders of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy given under the Indenture or as of the date of effectiveness of the Indenture or thereafter existing at law or in equity or otherwise.
No Waiver of Default
No delay or omission of the Trustee, the Credit Facility Provider (if any), the Liquidity Facility Provider (if any) or of any Holder of the Bonds to exercise any right or power arising upon the occurrence of any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein; and every power and remedy given by the Indenture to the Trustee, the Credit Facility Provider (if any), the Liquidity Facility Provider (if any) or the Holders of the Bonds may be exercised from time to time and as often as may be deemed expedient.
Notice to Bondholders of Default
The Trustee shall promptly give written notice by first class mail to the Bondholders, the Liquidity Facility Provider (if any) and the Credit Facility Provider (if any) of the occurrence of an Event of Default, if the Trustee has actual knowledge of such Event of Default.
Removal or Resignation of Trustee; Successor Trustee
The Authority may remove the Trustee at any time unless an Event of Default shall have occurred and then be continuing, and shall remove the Trustee if at any time the Trustee shall cease to be eligible in accordance with the Indenture, or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or its property shall be appointed, or any public officer shall take control or charge of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Trustee, and thereupon shall appoint, with the
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written consent of the Credit Facility Provider (if any), a successor Trustee by an instrument in writing.
The Trustee may at any time resign by giving written notice of such resignation to the Authority, the Credit Facility Provider (if any) and the Liquidity Facility Provider (if any) and by giving the Bondholders notice of such resignation by mail at the addresses shown on the bond registration books maintained by the Trustee. Upon receiving such notice of resignation, the Authority shall promptly appoint, with the written consent of the Credit Facility Provider (if any), a successor Trustee by an instrument in writing. The Trustee shall not be relieved of its duties until such successor Trustee has accepted appointment.
Any removal or resignation of the Trustee and appointment of a successor Trustee shall only become effective upon acceptance of appointment by the successor Trustee. If no successor Trustee shall have been appointed and have accepted appointment within 45 days of giving notice of removal or notice of resignation as aforesaid, the resigning Trustee or any Bondholder (on behalf of himself and all other Bondholders) may petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Trustee. Any successor Trustee appointed under the Indenture, shall signify its acceptance of such appointment by executing and delivering to the Authority and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee herein; but, nevertheless at the Request of the Authority or the request of the successor Trustee, such predecessor Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under the Indenture and shall pay over, transfer, assign and deliver to the successor Trustee any money or other property subject to the trusts and conditions set forth in the Indenture. Upon request of the successor Trustee, the Authority shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Trustee as provided in this paragraph, the Authority shall mail a notice of the succession of such Trustee to the trusts under the Indenture to each Rating Agency then rating the Bonds and to the Bondholders at the addresses shown on the bond registration books maintained by the Trustee. If the Authority fails to mail such notice within 15 days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Authority.
Any Trustee appointed under the provisions of the Indenture in succession to the Trustee shall be a trust company or bank having the powers of a trust company in the Commonwealth of Pennsylvania, having (or if such trust company or bank is a member of a bank holding company system, its bank holding company has) a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by federal or state authority. If such bank or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the
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purpose of this paragraph the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this paragraph, the Trustee shall resign immediately in the manner and with the effect specified in the Indenture.
Amendment of the Indenture
The Indenture and the rights and obligations of the Authority and of the Holders of the Bonds and of the Trustee may be modified or amended from time to time and at any time by an indenture or indentures supplemental thereto, which the Authority and the Trustee may enter into upon receipt of the written consent of (i) the Credit Facility Provider (if any) (so long as the Credit Facility is in effect or any amounts are owing to the Credit Facility Provider (if any) and the Credit Facility Provider (if any) is not then in default under its payment obligations under the Credit Facility) or (ii) the Holders of a majority in aggregate principal amount of all Bonds then Outstanding (if the Credit Facility is no longer in effect or the Credit Facility Provider (if any) is then in default under its payment obligations under the Credit Facility).
No such modification or amendment shall (1) extend the fixed maturity of any Bond, or reduce the amount of principal thereof, or change the method of computing the rate of interest thereon, or extend the time of payment of interest thereon, or extend the time of payment or reduce the amount of any mandatory sinking fund redemption, or reduce any premium payable upon the redemption thereof, without the consent of the Holder of each Bond so affected, or (2) reduce the aforesaid percentage of Bonds, the consent of the Holders of which is required to effect any such modification or amendment, or permit the creation of any lien on the Trust Estate prior to or on a parity with the lien created by the Indenture, or deprive the Holders of the Bonds of the lien created by the Indenture on such Trust Estate (except as expressly provided in the Indenture), without the consent of the Holders of all of the Bonds then Outstanding, or (3) modify any of the rights or obligations of the Trustee without its prior written consent thereto; nor shall the Trustee be required to consent to any such amendment that adversely affects its rights or obligations under the Indenture or under any Financing Facility.
The Indenture and the rights and obligations of the Authority, the Trustee and the Holders of the Bonds also may be modified or amended at any time by a Supplemental Indenture, which the Authority and the Trustee may enter into without the consent of any Bondholders or the Credit Facility Provider (if any), for any one or more of the following purposes (provided the same is not one of the enumerated items described above which requires such consent):
(1) to add to the covenants and agreements of the Authority contained in the Indenture other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved in the Indenture to or conferred upon the Authority;
(2) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Indenture, or in regard to matters or questions arising under the Indenture, as the Authority may
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deem necessary or desirable and not inconsistent with the Indenture and which do not materially adversely affect the interests of the Holder of the Bonds;
(3) to modify, amend or supplement the Indenture in such manner as to permit the qualification of the Indenture under the Trust Indenture Act of 1939, as amended, or any similar federal statute in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute;
(4) to make the Bonds eligible for deposit with any securities depository;
(5) to obtain or maintain a rating on the Bonds;
(6) to conform to the terms and provisions of any Financing Facility;
(7) to provide for the issuance of Additional Bonds as permitted by the Indenture;
(8) to modify, amend or supplement the Indenture to permit the establishment of a Revolving Fund to receive repayments of loans made from the proceeds of any Bonds (or the proceeds thereof) and for the Authority to grant or re-loan such amounts;
(9) To release the Debt Service Reserve Fund with respect to any Series of Bonds if such release is approved by any Credit Facility Provider and any Swap Provider which have Financing Facilities relating to such Series of Bonds; or
(10) Any other change which does not materially adversely affect the interests of the Holders of the Bonds.
Discharge of Indenture
The Bonds may be paid by the Authority in any of the following ways, provided that the Authority also pays or causes to be paid any other sums payable under the Indenture by the Authority: (A) by paying or causing to be paid all Bond Payment Obligations, as and when the same become due and payable; (B) by depositing with the Trustee, in trust, at or before maturity, money or securities in the necessary amount to pay or redeem all Bonds then Outstanding; or (C) by delivering to the Trustee, for cancellation by it, all Bonds then Outstanding.
If the Authority shall also pay or cause to be paid all other sums payable under the Indenture by the Authority and no amounts are owing with respect to any Financing Facility Payment Obligations (including any draws on a Credit Facility to pay amounts pursuant to (A) and/or (B) above) to each Financing Facility Provider (if any), then and in that case, at the election of the Authority (evidenced by a Certificate of the Authority, filed with the Trustee, signifying the intention of the Authority to discharge all such indebtedness and the Indenture) and upon receipt by the Trustee and each Financing Facility Provider (if any) of (i) an Opinion or Opinions of Counsel to the effect that the obligations under the Indenture, the Bonds and any Financing Facility Payment Obligations have been discharged and (ii) if the Bond Payment Obligations are not going to be fully paid within 120 days, a verification report prepared by an
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independent public accountant acceptable to the Trustee as to the sufficiency of the amounts deposited with the Trustee for such defeasance, and notwithstanding that any Bonds shall not have been surrendered for payment, the Indenture and the pledge of the Trust Estate under the Indenture and all covenants, agreements and other obligations of the Authority under the Indenture shall cease, terminate, become void and be completely discharged and satisfied, except only as other provided in the Indenture. In such event, upon Request of the Authority, the Trustee shall cause an accounting for such period or periods as may be requested by the Authority to be prepared and filed with the Authority and shall execute and deliver to the Authority all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee shall pay over, transfer, assign or deliver all moneys or securities or other property held by it pursuant to the Indenture that are not required for the payment or redemption of Bonds not theretofore surrendered for such payment or redemption (1) to each Financing Facility Provider (if any) to the extent of any amounts owed to such Facility Financing Provider (if any) and (2) otherwise, to the Authority; provided that in all events moneys in the Rebate Fund shall be subject to the provisions of the Indenture.
Discharge of Liability on Bonds
Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice, then all liability of the Authority in respect of such Bond shall cease, terminate, become void and be completely discharged and satisfied, except only that thereafter the Holder thereof shall be entitled to payment of the Bond Payment Obligation on such Bond by the Authority and the Authority shall remain liable for such payment, but only out of such money or securities deposited with the Trustee as aforesaid for its payment; provided further, however, that the provisions of described below under “Payment of Bonds After Discharge of Indenture” shall apply in all events.
Deposit of Money or Securities with Trustee
Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Indenture (other than the Rebate Fund) and shall be: (A) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity (for periods for which the actual interest rate is not known, based on the assumed interest rate permitted under the applicable Supplemental Indenture or if no such assumed rate is provided, at the maximum rate which may be borne by such Bonds), except that, in the case of Bonds that are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or Redemption Price of such Bonds and all unpaid interest thereon to the redemption date (for periods for which the actual interest rate is not known, based on the assumed interest rate permitted under the applicable Supplemental Indenture or if no such assumed rate is provided, at the maximum rate which may
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be borne by such Bonds); or (B) Defeasance Securities (not callable by the issuer thereof prior to maturity, unless with respect to such Defeasance Securities, such call by the issuer was anticipated in the verification report relating to the escrow of which such Defeasance Securities are a part) the principal of and interest on which when due (without any income from the reinvestment thereof) will provide money sufficient to pay the Bond Payment Obligation to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed (for periods for which the actual interest rate is not known, based on the assumed interest rate permitted under the applicable Supplemental Indenture or if no such assumed rate is provided, at the maximum rate which may be borne by such Bonds), as such Bond Payment Obligation become due, provided that, in the case of Bonds that are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice; provided, in each case, that the Trustee shall have been irrevocably instructed (by the terms of the Indenture or by Request of the Authority) to apply such money to the payment of such Bond Payment Obligation on such Bonds.
Payment of Bonds After Discharge of Indenture
Notwithstanding any provisions of the Indenture, any moneys held by the Trustee in trust for the payment of any Bond Payment Obligation and remaining unclaimed for five years (or, if less, one day before such moneys would escheat to the Commonwealth of Pennsylvania under then applicable Commonwealth law) after the principal of all of the Bonds has become due and payable (whether at maturity or upon call for redemption or by acceleration as provided in the Indenture), if such moneys were so held at such date, or five years (or, if less, one day before such moneys would escheat to the Commonwealth of Pennsylvania under then applicable Commonwealth law) after the date of deposit of such moneys if deposited after said date when all of the Bonds became due and payable, shall be repaid to the Authority (unless such moneys are proceeds of the Credit Facility and moneys are owed to the Credit Facility Provider (if any) by the Authority, in which event to the Credit Facility Provider (if any)) free from the trusts created by the Indenture, and all liability of the Trustee with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the Authority or the Credit Facility Provider (if any) as aforesaid, the Trustee may (at the cost of the Authority) first mail to the Holders of Bonds that have not yet been paid, at the addresses shown on the bond registration books maintained by the Trustee, a notice, in such form as may be deemed appropriate by the Trustee with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the Authority or the Credit Facility Provider (if any) of the moneys held for the payment thereof.
APPENDIX B-2
DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE H2O INDENTURE
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APPENDIX B-2
DEFINITIONS OF CERTAIN TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE H2O INDENTURE
The following is a brief summary of certain definitions and certain provisions of the H2O Indenture (referred to as the “Indenture” within this Appendix B-2). This summary does not purport to be comprehensive or definitive and is subject to all of the terms and provisions of the Indenture, a copy of which will be available at the offices of the H2O Trustee (referred to as the “Trustee” within this Appendix B-2). Unless otherwise specified below, all capitalized terms used in this Appendix B-2 and not defined below have the same meaning given to such terms in the forepart of this Official Statement.
Certain Definitions
The following terms apply to the summaries of the Indenture and to terms not otherwise defined in the Official Statement.
"Act 50" means Act No. 50 of the Commonwealth approved on October 9, 2009.
"Additional Bonds" means Bonds issued pursuant to the provisions of the Indenture described under the caption “Additional Bonds” below.
"Administrative Fees and Expenses" means any application, commitment, financing or similar fee charged, or reimbursement for administrative or other expenses incurred by the Trustee.
"Authorized Officer" means the Chairperson or the Treasurer of the Authority or any person or persons designated by the Authority by resolution to act on behalf of the Authority.
"BAB" or "BABs" shall mean a Build America Bond that qualifies for Subsidy Payments as a "qualified bond" under Section 6431 of the Code.
"Bond" or "Bonds" means the Authority's Prior Bonds, the 2013B Bonds and any Additional Bonds authorized by, and at any time Outstanding pursuant to, the Indenture.
"Bond Counsel" means legal counsel of recognized national standing in the field of obligations the interest on which is excluded from gross income for federal income tax purposes, selected by the Authority and not objected to by the Trustee or the Credit Facility Provider (if any).
"Bond Payment Obligations" means the Authority's obligation to pay the principal or Redemption Price of and interest on the Bonds, including (without duplicating any Financing Facility Payment Obligations) Bonds held by Financing Facility Providers.
"Build America Bond" shall have the meaning given in Sections 54AA and 6431 of the Code.
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"Business Day" means a day that is not a Saturday, Sunday or legal holiday on which banking institutions in the Commonwealth, the State of New York or in any state in which the office of the Liquidity Facility Provider (if any), the Credit Facility Provider (if any) or the Trustee is located are authorized to remain closed or a day on which the New York Stock Exchange is closed.
"Certificate," "Statement," "Request," "Requisition" and "Order" of the Authority, mean, respectively, a written certificate, statement, request, requisition or order signed in the name of the Authority by an Authorized Officer or such other person as may be designated and authorized to sign for the Authority and designated by an Authorized Officer in writing to the Trustee. Any such instrument and supporting opinions or representations, if any, may, but need not, be combined in a single instrument with any other instrument, opinion or representation, and the two or more so combined shall be read and construed as a single instrument.
"Clearing Fund" means the Clearing Fund established in the Indenture.
"Closing Certificate" means a Certificate of the Authority delivered pursuant to the Indenture in connection with the issuance of Bonds.
"Costs of Issuance" means all items of expense directly or indirectly payable by or reimbursable to the Authority and related to the authorization, issuance, sale and delivery of the Bonds, including but not limited to costs of preparation and reproduction of documents, printing expenses, filing and recording fees, initial fees and charges of the Trustee and its counsel, legal fees and charges, fees and disbursements of consultants and professionals, fees and charges for preparation, execution and safekeeping of the Bonds and any other cost, charge or fee in connection with the original issuance of the Bonds.
"Credit Facility" means a letter of credit, including, if applicable, a confirming letter of credit, bond insurance policy, surety or other credit facility issued by a commercial bank, savings institution, insurer or other financial institution, or obtained under a government insurance program, which, by its terms, shall secure the payment of the principal of and interest on a Series of Bonds when due.
"Credit Facility Provider" means the issuer of a Credit Facility.
"Debt Service Fund" means the Debt Service Fund established in the Indenture.
"Debt Service Requirements" means, with respect to a Payment Date, all Bond Payment Obligations and Parity Financing Facility Payment Obligations coming due and payable on such Payment Date.
"Debt Service Reserve Fund" means the Debt Service Reserve Fund established in the Indenture.
"Debt Service Reserve Fund Requirements" means the amount set forth for a particular series of Bonds in the Supplemental Indenture pursuant to which they were issued.
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"Defeasance Securities" means the following: (i) cash; (ii) U.S. Treasury Certificates, Notes and Bonds (including State and Local Government Series – “SLGs”); (iii) direct obligations of the U.S. Treasury which have been stripped by the U.S. Treasury itself, CATS, TIGRS and similar securities; (iv) the interest component of Resolution Funding Corp. strips which have been stripped by request to the Federal Reserve Bank of New York in book entry form; (v) pre-refunded municipal bonds rated "Aaa" by Moody's and "AAA" by S&P. If, however, the issue is only rated by S&P (i.e., there is no Moody's rating), then the pre-refunded bonds must have been pre-refunded with cash, direct U.S. or U.S. guaranteed obligations, or AAA rated pre-refunded municipals to satisfy this condition; (vi) obligations issued by the following agencies which are backed by the full faith and credit of the United States: (a) U.S. Export-Import Bank (Eximbank) – Direct obligations or fully guaranteed certificates of beneficial ownership; (b) Farmers Home Administration (FmHA) – Certificates of beneficial ownership; (c) Federal Financing Bank; (d) General Services Administration – Participation certificates; (e) U.S. Maritime Administration — Guaranteed Title XI financing; and (f) U.S. Department of Housing and Urban Development (HUD) — Project Notes; Local Authority Bonds; New Communities Debentures — U.S. government guaranteed debentures; and U.S. Public Housing Notes and Bonds — U.S. government guaranteed public housing notes and bonds.
"Department" means the Department of Community and Economic Development of the Commonwealth.
"Electronic Means" means telecopy, telegraph, telex, facsimile transmission, email transmission or other similar electronic means of communication, including a telephonic communication confirmed by writing or written transmission.
"Event of Default" means any of the events described under "Events of Default" below.
"Event of Non-Appropriation" shall be deemed to have occurred under the Indenture if the Legislature shall fail to appropriate funds to the Department for any Fiscal Year in the amount required for the Department to meet its obligations to the Authority under the H2O Service Agreement (referred to as the “Service Agreement” in this Appendix B-2).
"Favorable Opinion of Bond Counsel" means, with respect to any action the occurrence of which requires such an opinion, an Opinion of Counsel, which shall also be Bond Counsel, to the effect that such action is permitted under the Indenture and, if such Bonds are: (i) Tax-Exempt, will not, in and of itself, result in the inclusion of interest on the Bonds in gross income for federal income tax purposes, and (ii) BABs, will not result in the loss of the Subsidy Payments to the Authority or its designee.
"Financing Facility" means any Swap Agreement, Credit Facility or Liquidity Facility approved by the Authority and entered into in connection with the Bonds of the Authority.
"Financing Facility Payment Obligations" means all payment and reimbursement obligations (without duplicating any Bond Payment Obligations) of the Authority to a Financing Facility Provider in connection with any Financing Facility.
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"Financing Facility Provider" means the issuer or provider of a Financing Facility, including a Swap Provider, a Credit Facility Provider and a Liquidity Facility Provider.
"Fiscal Year" means the fiscal year of the Commonwealth which presently includes the twelve (12) month period commencing July 1 of each year and ending on the succeeding June 30.
"Fitch" means Fitch Inc., its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Authority by notice to the other Interested Parties.
"H2O Grant Program" means the grant program provided for in the H2O PA Act and Act 50.
"H2O PA Act" means 32 P.S. Section 694 et seq.
"Holder" or "Bondholder," when used with respect to a Bond, means the Person in whose name such Bond is registered. A Credit Facility Provider or Liquidity Facility Provider which owns Bonds by purchase or is subrogated to the rights of Bondholders is a Bondholder for purposes of the Indenture.
"Interested Parties" means the Authority, the Trustee and any Financing Facility Provider.
"Interest Payment Date" means (i) with respect to the 2013B Bonds, each of the Interest Payment Dates described in the forepart of this Official Statement and (ii) with respect to other series of Bonds, as set forth in the Initial H2O Indenture or the Supplemental Indenture, as applicable, authorizing the issuance thereof.
"Interest Subsidy Payment Subaccount" means the account by that name established pursuant to the Indenture.
"Investment Agreement" means an investment agreement with (i) a commercial bank or trust company or a national banking association in any case having a capital stock and surplus of more than $100,000,000, or (ii) an insurance company with the highest rating provided by A.M. Best Company, or (iii) a corporation; provided that the credit of such commercial bank or trust company or national banking association, insurance company or corporation, as the case may be, is rated (or, in the case of a corporation, whose obligations thereunder are guaranteed by a corporation whose credit is rated) not lower than the rating category of any two Rating Agencies then rating the Bonds required to maintain the rating then in effect or to obtain the rating to be obtained on the Bonds in respect of which such Investment Agreement is entered into, which agreement provides for the investment of funds held in the Funds and Accounts, which funds shall be collateralized by at least one hundred two (102%) percent in principal amount of Investment Securities, as the same may be amended from time to time.
"Investment Securities" means and include any of the following securities, if and to the extent the same are at the time legal for investment of the Authority's funds:
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(i) Defeasance Securities;
(ii) Negotiable or non-negotiable interest bearing deposits (or other deposit arrangements) issued by any bank, trust company or national banking association, including the Trustee, which deposits shall be continuously secured or collateralized by obligations described in subparagraph (i) of this definition, which shall have a market value at all times at least equal to the principal amount of such certificates of deposit and shall be lodged with the Trustee, as custodian, by the bank, trust company or national banking association issuing such deposits;
(iii) Uncollateralized negotiable or non-negotiable certificates of deposit (or other time deposit arrangements) issued by any bank, trust company or national banking association, the unsecured obligations of which are rated, at the time of purchase, in one of the two highest Rating Categories, by any two Rating Agencies;
(iv) Repurchase agreements collateralized by obligations described in subparagraphs (i), (ii) or (iii) of this definition with any registered broker/dealer subject to the Securities Investors' Protection Corporation jurisdiction, which has an uninsured, unsecured and unguaranteed obligation rated in one of the two highest Rating Categories, by any two Rating Agencies, or any commercial bank with the above ratings, provided: (a) a master repurchase agreement or specific written repurchase agreement governs the transaction, which characterizes the transaction as a purchase and sale of securities, (b) the securities are held, free and clear of any lien, by the Trustee or an independent third party acting solely as agent for the Trustee, and such third party is (i) a Federal Reserve Bank, (ii) a bank which is a member of the Federal Deposit Insurance Corporation and which has combined capital, surplus and undivided profits of not less than $75,000,000 or (iii) a bank approved in writing for such purpose by each Financing Facility Provider, if any, and the Trustee shall have received written confirmation from such third party that it holds such securities, free and clear of any lien, as agent for the Trustee; (c) a perfected first security interest under the Uniform Commercial Code, or book entry procedures prescribed at 31 CFR 306.1 et seq. or 31 CFR 350.0 et seq. or a successor provision in such securities is created for the benefit of the Trustee; (d) the repurchase agreement has a term of six months or less, or the Trustee or its agent will value the collateral securities no less frequently than weekly and will liquidate the collateral securities if any deficiency in the required collateral percentage is not restored within two Business Days of such valuation; (e) the repurchase agreement matures on or before a Payment Date (or, if held in a Fund other than the Debt Service Fund, other appropriate liquidation period); and (f) the fair market value of the securities in relation to the amount of the repurchase obligation is equal to the collateral levels established by a Rating Agency for the rating assigned by the Rating Agency to the seller;
(v) Banker's acceptances, eurodollar deposits and certificates of deposit (in addition to the certificates of deposit provided for by subparagraphs (ii) and (iii) above) of the domestic branches of foreign banks having a capital and surplus of $1,000,000,000 or more, or any bank or trust company organized under the laws of the United States of America or Canada, or any state or province thereof, having capital and surplus, in the amount of $1,000,000,000; provided that the aggregate maturity value of all such banker's acceptances and certificates of deposit held at any time as investments of Funds under the Indenture with respect to any particular bank, trust company, or national association shall not exceed 5% of its capital and surplus; and provided
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further than any such bank, trust company, or national association shall be rated in one of the two highest Rating Categories, by any two Rating Agencies;
(vi) Other obligations of the United States of America or any agency thereof which may then be purchased with funds belonging to the Commonwealth of Pennsylvania or which are legal investments for savings banks in the Commonwealth of Pennsylvania;
(vii) Obligations of any state, commonwealth or possession of the United States or a political subdivision thereof or any agency or instrumentality of such a state, commonwealth, possession or political subdivision, provided that at the time of their purchase such obligations are rated in either of the two highest Rating Categories, by any two Rating Agencies then rating the Bonds;
(viii) Commercial paper with a maturity date not in excess of 270 days rated by the Rating Agencies at least equal to the rating assigned by the Rating Agencies to the applicable Series of Bonds and in no event lower than the "A" Rating Category established by a Rating Agency (which may include subcategories indicated by plus or minus or by numbers) at the time of such investment, issued by an entity incorporated under the laws of the United States or any state thereof;
(ix) Shares of a diversified open-end management investment company as defined in the Investment Company Act of 1940, which is a money market fund, which is then rated in any of the three highest Rating Categories by at least one Rating Agency which is then rating the Bonds or money market accounts of the Trustee or any bank or trust company organized under the laws of the United States or any state thereof which has a combined capital and surplus of not less than $75,000,000;
(x) Investment contracts (a) providing for the future purchase of securities of the type described in (i), (ii), (iii) and (vii) above, which contracts have been approved for sale by a national securities exchange and all regulatory authorities having jurisdiction or (b) the obligor under which or the guarantor thereof shall have a credit rating such that its long term debt is rated in one of the two highest Rating Categories, by any two Rating Agencies then rating the Bonds;
(xi) Investment Agreements;
(xii) Investments by the Commonwealth of Pennsylvania Department of Treasury pursuant to the Memorandum of Understanding with the Authority dated December 1, 2006, or any successor agreement providing for investments pursuant to the Commonwealth Financing Authority Investment Policy, or any investment in the Pennsylvania Invest Daily fund; and
(xiii) Any other investment authorized in writing by all Credit Facility Providers.
"Legislature" means the General Assembly of the Commonwealth.
"Liquidity Facility" means a standby bond purchase agreement, letter of credit or other liquidity facility issued by a commercial bank, savings institution, insurer or other institution which, by its terms, shall provide for the payment of the purchase price of a Series of Bonds
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tendered and not remarketed; such Liquidity Facility may be part of, or separate from, any other Financing Facility providing credit enhancement for the Bonds.
"Liquidity Facility Provider" means the issuer of a Liquidity Facility.
"Maturity Date" means the maturity dates of Bonds set forth in the Indenture.
"Moody's" means Moody's Investors Service, its successors and their assigns, or, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Authority by notice to the other Interested Parties.
"Obligations" means Bond Payment Obligations and Financing Facility Payment Obligations.
"Opinion of Counsel" means a written opinion of counsel (who may be counsel for the Authority) selected by the Authority and not objected to by the Trustee, the Credit Facility Provider (if any) or the Liquidity Facility Provider (if any).
"Outstanding," when used as of any particular time with reference to Bonds, means (subject to the provisions of the Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except: (1) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Bonds with respect to which all liability of the Authority shall have been discharged; and (3) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture.
"Parity Financing Facility Payment Obligations" means all Financing Facility Payment Obligations other than those Financing Facility Payment Obligations which are expressly subordinate to other Financing Facility Payment Obligations and Bond Payment Obligations by their terms.
"Parity Obligation" means all Bond Payment Obligations and all Parity Financing Facility Payment Obligations.
"Payment Date" means each date on which an Obligation shall be due and owing.
"Person" means an individual, corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.
"Principal Payment Date" means, with respect a Bond, the date on which principal of such Bond becomes due and payable, either by maturity, redemption, acceleration or otherwise.
“Prior Bonds” means the “Prior H2O Bonds” as defined in the front portion of this Official Statement.
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"Project" means the funding of the H2O Grant Program established in the H2O PA Act and modified by Act 50.
"Project Costs" means those uses of the proceeds of Bonds as the Authority may deem necessary and desirable in accordance with the Act, H2O PA Act and Act 50 including the use for any of the following: (i) making grants; (ii) paying incidental expenses in connection with activity under (i) above, including administrative costs of the Authority and the Department; (iii) paying expenses of authorizing and issuing the Bonds, including, but not limited to, the payment of any amounts to the Rebate Fund; (iv) paying principal, redemption or purchase price and interest on Bonds; and (v) funding reserves. Such Project Costs shall be expended only for purposes permitted under the Code.
"Project Fund" means the fund by that name established pursuant to the Indenture.
"Rating Agency" means S&P, Moody's and Fitch.
"Rating Category" means one of the general rating categories of the Rating Agencies without regard to any refinement or graduation of such rating category by numerical modifier or otherwise.
"Rebate Fund" means the fund by that name established pursuant to the Indenture.
"Record Date" means (1) with respect to the 2013B Bonds, the fifteenth day (whether or not a Business Day) of the calendar month next preceding each Interest Payment Date. and (2) with respect to any other Series of Bonds, as set forth in the Initial H2O Indenture or the Supplemental Indenture, as applicable, authorizing the issuance thereof.
"Redemption Price" means, with respect to any Bond (or portion thereof), the principal amount of such Bond (or portion) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and the Indenture.
"Required Stated Amount" means, at any time of calculation with respect to any Series of Bonds, an amount equal to the aggregate principal amount of all Bonds of such Series then Outstanding together with interest accruing thereon (assuming an annual rate of interest equal to the maximum rate payable thereon) for the period specified in a Certificate of the Authority to be the minimum period specified by the Rating Agencies then rating the Bonds of such Series as necessary to maintain, in the case of the Liquidity Facility, the short-term rating of the Bonds of such Series, or, in the case of the Credit Facility, the long-term rating of the Bonds of such Series.
"Revenue Fund" means the Revenue Fund established under the Indenture.
"Revenues" means all amounts received and to be received from the Department by the Authority or the Trustee for the account of the Authority pursuant to or with respect to the Service Agreement other than the Service Fee Component constituting Administrative Expenses (as those terms are defined in the Service Agreement) under the Service Agreement and amounts required to be deposited into the Rebate Fund, and with respect to the BABs, Subsidy Payments, if any.
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"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc., its successors and their assigns, or, if such division or corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Authority by notice to the other Interested Parties.
"Securities Depository" means The Depository Trust Company and its successors and assigns, or any other securities depository, which agrees to follow the procedures required to be followed by such securities depository in connection with the Bonds.
"Securities Depository Participant" means a member of, or participant in, the Securities Depository.
"Series," when used with respect to the Bonds, means all the Bonds designated as being of the same series, authenticated and delivered in a simultaneous transaction, and any Bonds thereafter authenticated and delivered upon a transfer or exchange or in lieu of or in substitution for such Bonds as provided in the Indenture.
"Service Agreement" means the H2O Service Agreement described in the forepart of the Official Statement, as it may from time-to-time be further supplemented, modified or amended in accordance with the terms thereof and of the Indenture.
"Special Record Date" means the date established by the Trustee pursuant to the Indenture as a record date for the payment of defaulted interest on the Bonds.
"Subsidy Payments" means payments received from the United States Treasury in connection with Bonds which constitute BABs pursuant to Section 6431 of the Code.
"Supplemental Indenture" means any indenture duly authorized and entered into between the Authority and the Trustee, supplementing, modifying or amending the Indenture; but only if and to the extent that such Supplemental Indenture is specifically authorized under the Indenture.
"Surplus Fund" means the Surplus Fund established in the Indenture.
"Swap" or "Swap Agreement" means any agreement between the Authority and a Swap Provider confirming a transaction which is a rate swap transaction, basis swap, forward rate transaction, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, corridor transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of these transactions.
"Swap Payment Obligations" means, for any period of time, all net amounts payable by the Authority (including Swap Termination Payments payable by the Authority) under any Swap.
"Swap Provider" means the Authority's or the Trustee's counterparty under a Swap Agreement.
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"Swap Revenues" means all amounts received by the Authority or the Trustee pursuant to any Swap, including without limitation any Swap Termination Payment.
"Swap Termination Payment" means, with respect to any Swap, any settlement amount payable by the applicable Swap Provider or the Authority by reason or on account of the early termination of such Swap. The term "Swap Termination Payment" shall not include net unpaid amounts which would have been payable by the Swap Provider or the Authority pursuant to the terms of the applicable Swap irrespective of the early termination of such Swap.
"Tax Certificate" means the Tax Certificate or similar document delivered by the Authority at the time of issuance and delivery of a Series of the Bonds, as the same may be amended or supplemented in accordance with its terms.
"Tax-Exempt" means, with respect to any Bond, that Bond Counsel has delivered an opinion that the interest thereon is not includable in gross income for federal income tax purposes.
"Trust Estate" shall have the meaning set forth under "Trust Estate" below.
"Trustee" means The Bank of New York Mellon Trust Company, N.A., a national banking association duly organized and existing under the laws of the United States of America, having a corporate trust office in Philadelphia, Pennsylvania, or its successor, as Trustee under the Indenture.
Trust Estate
Under the Indenture, the Authority has pledged and assigned to the Trustee and granted to the Trustee a security interest in all right, title and interest of the Authority in and to (i) all Revenues, (ii) all moneys deposited into accounts or funds created by the Indenture and held by or on behalf of the Trustee (other than the Rebate Fund), (iii) all payments received by the Authority or the Trustee pursuant to Financing Facilities, (iv) all investment earnings on moneys held in accounts and funds established by the Indenture, other than the Rebate Fund, and (v) proceeds of clauses (i) through (iv) above (collectively, the "Trust Estate").
The Trust Estate is held by the Trustee for the equal and proportionate benefit and security of all Obligations, all of which, regardless of the time or times of their delivery or maturity, shall be of equal rank without preference, priority or distinction as to lien or otherwise of any Obligation over any other Obligation, except (a) as otherwise permitted by or provided for in the Indenture, (b) for Financing Facility Payment Obligations which do not constitute Parity Financing Facility Payment Obligations, which shall be expressly subordinate to other Obligations and (c) that any funds held by the Trustee (i) for the payment of specific Bonds or Financing Facility Payment Obligations which are deemed to have been paid under the Indenture or (ii) otherwise to provide additional security or an additional source of payment for specific Bonds or Obligations, shall be held and used only to pay or provide security for the Bonds or Obligations for which such fund is held and shall not be held as security on a parity for all Obligations.
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Additional Bonds
The Authority may issue Additional Bonds from time-to-time for the purpose of funding Project Costs or for the purpose of refunding part or all of the outstanding Bonds of any Series. Such Additional Bonds may be issued and the Trustee shall authenticate and deliver such Additional Bonds when there have been filed with the Trustee, among other things, the following: (A) a certified resolution of the Authority authorizing the execution and delivery of a Supplemental Indenture providing for the provisions of, and the issuance, sale, execution and delivery of, such Additional Bonds; (B) a Supplemental Indenture and an amendment to the Service Agreement which extends the Department's obligation to make payments thereunder to such Additional Bonds; (C) an Opinion of Counsel, addressed to the Authority and to the Trustee, which includes opinions to the effect that (1) the issuance of the Additional Bonds is permitted under the Indenture, the Act and the H2O PA Act and (2) each of the Supplemental Indenture and the Additional Bonds has been authorized, executed and delivered and is a valid, binding and enforceable obligation of the Authority; (D) a Certificate of the Authority that the Authority is not in default under the Indenture; and (E) evidence satisfactory to the Trustee that, upon issuance of the Additional Bonds, an amount sufficient to satisfy the Debt Service Reserve Requirement, if any, will be on deposit in the Debt Service Reserve Fund.
Application of Proceeds
The Trustee shall deposit all of the proceeds of Bonds into the Clearing Fund created under the Indenture and, as directed in a Closing Certificate, shall pay from the Clearing Fund all Costs of Issuance of the Bonds and shall make such transfers from the Clearing Fund to the Project Fund, the Debt Service Fund and the Debt Service Reserve Fund (if required) as directed in such Closing Certificate. The Closing Certificate shall provide that all of the Available Project Proceeds of the 2013B Bonds shall be deposited into the 2013 Bonds Account of the Project Fund, less the amount, if any, to be deposited into the Debt Service Reserve Fund.
Establishment and Application of Project Fund
The moneys in the Project Fund established by the Trustee under the Indenture shall be withdrawn by the Trustee and paid to the Authority for application to Project Costs.
In connection with the issuance of the 2013B Bonds, the Trustee shall establish an account entitled "2013 Bonds Account of the Project Fund" for the proceeds of the 2013B Bonds. In the event the Authority requires the repayment of an amount paid from the 2013 Bonds Account of the Project Fund, then the Authority shall deposit such repayment in the 2013 Bonds Account of the Project Fund. Payments from the accounts within the Project Fund shall be made upon requisition by the Authority.
When the Project funded with the proceeds of the 2013B Bonds shall have been completed or when the Authority shall have decided not to pay any further Project Costs from the account in the Project Fund established for the 2013B Bonds, the Authority shall deliver to the Trustee a Certificate stating such fact and requesting that such account be closed. Upon the receipt of such Certificate, the Trustee shall, as directed by said Certificate, transfer any remaining balance in the 2013 Bonds Account of the Project Fund to the Debt Service Fund for
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the redemption or payment of 2013B Bonds, provided that, the Authority delivers to the Trustee a Favorable Opinion of Bond Counsel, provided further, however, if the Authority wants to utilize the balances for a different application, the Authority shall also provide a Favorable Opinion of Bond Counsel. Upon such transfer, such account shall be closed.
Revenue Fund
The Trustee shall deposit in the Revenue Fund established under the Indenture all Revenues (other than Subsidy Payments) and any other amounts received by the Trustee from any source, including Swap Revenues and other amounts received pursuant to Financing Facilities, unless otherwise expressly provided in the Indenture, for deposit to the Revenue Fund when and as such Revenues and other amounts are received.
All amounts in the Revenue Fund shall be withdrawn by the Trustee and deposited into the following funds in the following order of priority except as provided with respect to the Rebate Fund:
First, the Trustee shall withdraw from the Revenue Fund and deposit into the Debt Service Fund on or before each Payment Date the amounts which, together with moneys already on deposit therein, are sufficient to make the payments described in the third paragraph under "Debt Service Fund" below;
Second, the Trustee shall withdraw from the Revenue Fund and deposit into the Debt Service Reserve Fund on or before June 1 of each year the amount, if any, required to make the amount on deposit in the Debt Service Reserve Fund equal to the Debt Service Reserve Requirement for each Series of Bonds subject to the Debt Service Reserve Requirement.
Third, the Trustee shall withdraw from the Revenue Fund the amounts necessary to pay any Administrative Fees and Expenses due and owing on any Payment Date and shall pay the same.
Fourth, the Trustee shall withdraw from the Revenue Fund and deposit into the Debt Service Fund on each Payment Date the amount which, together with moneys already on deposit, is sufficient to pay any Financing Facility Payment Obligations which are not Parity Financing Facility Payment Obligations but which are then due and owing.
Fifth, the Trustee shall withdraw from the Revenue Fund and deposit into the Surplus Fund on the day following the last scheduled Payment Date preceding June 30 in each year, any amounts remaining in the Revenue Fund.
Debt Service Fund
The Trustee shall establish and maintain a separate account in the Debt Service Fund established under the Indenture for the 2013B Bonds (the "2013B Bonds Debt Service Account").
Subsidy Payments shall (i) in the case of Subsidy Payments relating to Prior Bonds which qualify as BABs be deposited directly into the applicable Interest Subsidy Payment Subaccount
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of the applicable Debt Service Account to be used to pay the interest component of Bond Payment Obligations relating to such BABs, and (ii) in connection with any Additional Bonds that qualify as BABs, be deposited as set forth in such Supplemental Indenture relating to such Additional Bonds.
The Trustee shall pay out of the Debt Service Fund established under the Indenture (1) on or before each Payment Date for any of the Bonds, any Bond Payment Obligation due and owing on such Payment Date and any other unpaid Bond Payment Obligation; (2) on or before each Payment Date for any Financing Facility, the amount of any Parity Financing Facility Payment Obligation due and owing on such Payment Date (including any Swap Termination Payments which are Parity Obligations); (3) on or before each Payment Date, any amounts required to be deposited in the Rebate Fund. Unless there has been an Event of Default, so long as a Credit Facility is in effect for a particular Series of Bonds and has been drawn upon to provide sufficient funds to pay Debt Service Requirements when due as required in the Indenture, the Trustee shall use moneys in the Debt Service Fund deposited by the Authority with respect to such Series of Bonds to reimburse the Credit Facility Provider (if any) for such drawing in such manner as to provide for receipt by the Credit Facility Provider (if any) on the same Business Day as the draw is funded.
The Trustee shall pay out of the Debt Service Fund on any Payment Date the amount of any Financing Facility Payments which are not Parity Financing Facility Payment Obligations but which are then due and owing after payment of any amounts due and owing on the same date pursuant to the next preceding paragraph above.
At any time prior to giving notice of mandatory sinking fund redemption, the Trustee shall, upon direction of the Authority, apply such moneys to the purchase of Bonds of the appropriate Series and maturity at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Debt Service Fund) as the Authority may direct, except that the purchase price (excluding accrued interest but including brokerage and all other charges) shall not exceed the par amount of such Bonds. If, prior to giving notice of a mandatory sinking fund redemption, the Trustee has purchased Bonds with moneys in the Debt Service Fund, such Bonds so purchased or deposited or redeemed shall be applied, to the extent of the full principal amount thereof, to reduce said mandatory sinking fund redemption. All Bonds purchased or deposited pursuant to this paragraph shall be cancelled and destroyed by the Trustee. All Bonds purchased from the Debt Service Fund or deposited by the Authority with the Trustee shall be allocated first to the next succeeding mandatory sinking fund redemption, then to the remaining mandatory sinking fund redemptions as selected by the Authority.
Debt Service Reserve Fund
There will be no deposit in the Debt Service Reserve Fund established under the Indenture to secure the 2013B Bonds, and Bonds are not required to be secured by the Debt Service Reserve Fund. The Trustee may set up separate accounts in the Debt Service Reserve Fund for the proceeds of a specified Series of Additional Bonds and the applicable Supplemental Indenture shall specify whether or not the account funded with proceeds of the Series of Additional Bonds issued thereunder is to secure solely such Series or also is to secure other
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Series of Bonds which have funded the Debt Service Reserve Fund and/or other Parity Obligations.
Surplus Fund
The Trustee shall withdraw from the Surplus Fund established under the Indenture and deposit into the Revenue Fund without direction of the Authority any amounts required for the Trustee to make the necessary deposits from the Revenue Fund into the Debt Service Fund or the Debt Service Reserve Fund. Upon direction of the Authority, the Trustee shall apply moneys held in the Surplus Fund to any one or more of the following purposes: (1) the purchase or redemption of any Bonds on market-rate terms and the payment of expenses of any such purchase or redemption; (2) payments into the Rebate Fund; and (3) payments into the account of the Project Fund directed by the Authority.
Rebate Fund
Subject to the provisions of the Indenture, all money at any time deposited in the Rebate Fund established under the Original Indenture shall be held by the Trustee in trust, to the extent required to satisfy the Rebate Amount (as defined in the applicable Tax Certificate) or to make yield reduction payments, for payment to the federal government of the United States of America. The Authority, the Holder of any Bonds or any Financing Facility Provider shall have no rights in or claim to such money. A separate account shall be established within the Rebate Fund for the 2013B Bonds, and shall be maintained pursuant to the Tax Certificate for the 2013B Bonds and the Indenture.
Investment of Moneys
All moneys in any of the funds and accounts established pursuant to the Indenture shall be invested by the Trustee, upon the written direction of the Authority, solely in Investment Securities. Investment Securities shall be purchased at such prices as the Authority may direct. In the absence of directions from the Authority, the Trustee shall invest in the Pennsylvania Invest Daily fund or its successor or, if not available, investments by the Commonwealth of Pennsylvania Department of Treasury pursuant to the Memorandum of Understanding with the Authority dated December 1, 2006, or any successor agreement providing for investments pursuant to the Commonwealth Financing Authority Investment Policy. Moneys in all funds and accounts shall be invested in Investment Securities maturing not later than the date on which it is estimated that such moneys will be required for the purposes specified in the Indenture. Investment Securities purchased under a repurchase agreement may be deemed to mature on the date or dates on which the Trustee may deliver such Investment Securities for repurchase under such agreement.
All interest, profits and other income received from the investment of moneys in any fund or account established pursuant to the Indenture shall be deposited when received in such fund or account except that earnings on any portion of the Debt Service Reserve Fund which (A) is allocable to any Bonds which are BABs shall be deposited into the Project Fund for such Bonds for as long as such Project Fund is open unless the Authority receives a Favorable Opinion of Bond Counsel, (B) is allocable to any Bonds which are Tax-Exempt, shall be deposited into the
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Debt Service Fund, and (C) is allocable to any Bonds which are neither Tax-Exempt nor BABs shall be deposited (1) into the Project Fund for such Bonds for as long as such Project Fund is open, and (2) into the Revenue Fund once such Project Fund has been closed. Notwithstanding anything to the contrary contained in this paragraph, an amount of interest received with respect to any Investment Security equal to the amount of accrued interest, if any, paid as part of the purchase price of such Investment Security shall be credited to the fund or account for the credit of which such Investment Security was acquired.
Moneys held in the Debt Service Fund for the redemption of Bonds shall be invested solely in Defeasance Securities, maturing in such amounts and at such times as are required for such redemption.
Financing Facilities
The Authority is permitted to enter into various Credit Facilities and Liquidity Facilities with respect to Bonds which will be secured by the Trust Estate as set forth in the Indenture.
The Authority may enter into one or more Swap Agreements which shall be entitled to the benefits contemplated for Swap Agreements under the Indenture upon compliance with the requirements set forth in the Indenture. Unless expressly subordinated, Swap Termination Payments owed by the Authority shall be Parity Financing Facility Payment Obligations which shall be due and owing on the first Payment Date in (A) the following fiscal year of the Commonwealth, if the Swap Termination Payment results from a termination or similar event that occurs more than six months prior to the commencement of such fiscal year or (B) the second following fiscal year of the Commonwealth, if the Swap Termination Payment results from a termination or similar event that occurs six months or less prior to the commencement of a fiscal year of the Commonwealth.
Encumbrances
The Authority shall not create, or permit the creation of, any pledge, lien, charge or other encumbrance upon the Revenues and other assets pledged or assigned under the Indenture while any of the Bonds or Financing Facilities are Outstanding, except the pledge and assignment created by the Indenture. Subject to this limitation, the Authority expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, including other programs under the Act, and reserves the right to issue other obligations for such purposes.
Tax Covenants
The Authority shall at all times do and perform all acts and things permitted by law and the Indenture that are necessary or desirable in order to assure that interest paid on any Bonds issued as Tax Exempt will be excluded from gross income for purposes of federal income taxes and shall take no action that would result in such interest not being excluded from gross income for federal income taxes. The Authority shall at all times do and perform all acts and things permitted by law and the Indenture that are necessary or desirable in order to assure that any Bonds issued as BABs will continue to qualify as BABs under the Code.
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Service Agreement
The Authority agrees to comply with the terms of the Service Agreement, including working with the Department to provide the necessary notices to the Commonwealth. Pursuant to the Service Agreement, the Trustee agrees to provide notice to the Department no later than January 1 of each year of the amount on deposit in the Interest Subsidy Payment Subaccount on December 16 of the preceding calendar year. The Authority agrees to provide promptly to the Trustee a copy of the "Service Fee Estimate" provided by the Department to the Commonwealth pursuant to the Service Agreement. In the event the Trustee has not received evidence of the provision of such Estimate by January 20 of each year (or, if the Commonwealth fiscal year changes, 5 days after such Estimate is required to be delivered), then it promptly shall make inquiry with respect to the status of the provision of such Estimate. Subject to the provisions of the Indenture with respect to the control of remedial proceedings by the Credit Facility Provider (if any), the Trustee shall seek to cause the Department to perform all duties imposed upon it pursuant to the Service Agreement. In addition, the Trustee shall promptly collect all amounts due from the Department pursuant to the Service Agreement.
The Authority may amend, modify or terminate any of the terms of the Service Agreement: (1) without the consent of the Trustee, any Bondholders or any Financing Facility Provider if such amendment, modification or termination will not materially adversely affect the interests of the Bondholders or the Financing Facility Providers; and (2) with the written consent of (i) the Financing Facility Provider (if any) (provided that the Financing Facility is then in effect or any amounts are owing to the Financing Facility Provider and the Financing Facility Provider (if any) is not in default under its payment obligations under the Financing Facility) and (ii) the Holders of a majority in principal amount of the Bonds then Outstanding (unless the Indenture or the applicable Supplemental Indenture provides that such Financing Facility Provider may vote on behalf of the Holders of the Bonds to which its Financing Facility relates). No such amendment, modification or termination shall reduce the amounts to be paid to the Authority or the Trustee by the Department pursuant to the Service Agreement below the amounts necessary to make payments under the Indenture, or extend the time for making such payments, without the written consent of all of the Holders of all Obligations then Outstanding. In connection with any amendment, modification or termination of the terms of the Service Agreement, the Authority shall cause to be delivered to the Trustee a Favorable Opinion of Bond Counsel.
Events of Default
Any one or more of the following events shall be Events of Default:
(A) default in the due and punctual payment of any Bond Payment Obligation when and as the same shall become due and payable;
(B) default in the due and punctual payment of any Parity Financing Facility Payment Obligation when and as the same shall become due and payable;
(C) default by the Authority in the observance of any of the other covenants, agreements or conditions on its part in the Indenture or in the Bonds (including default in the
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making of any payment not specified in paragraph (A) or (B) above), if such default shall have continued for a period of 30 days after written notice thereof, specifying such default and requiring the same to be remedied, shall have been given to the Authority by the Trustee, or to the Authority and the Trustee by the Credit Facility Provider (if any) or the Holders of not less than 25% in aggregate principal amount of the Bonds at the time Outstanding;
(D) the Service Agreement for any reason shall cease to be valid and binding upon the Department or shall be declared to be null and void as a result of an act of the Legislature or a final, nonappealable judgment or order of a court or governmental agency or authority having jurisdiction over the Department; or in a judicial proceeding or any other official action commenced by the Department, the validity or enforceability of the Service Agreement shall be contested by the Department or the Department shall deny that it has any or further liability or obligation under the Service Agreement;
(E) receipt by the Trustee of notice from the Credit Facility Provider (if any) that an Event of Default (as defined in the Financing Facility) has occurred under a Credit Facility and requesting acceleration of the Bonds; or
(F) the Authority shall commence an action in bankruptcy or otherwise consent to or accept a plan for relief under federal or state bankruptcy laws.
NOTWITHSTANDING ANYTHING CONTAINED IN THE PROVISIONS OF THE INDENTURE DESCRIBED UNDER THIS HEADING TO THE CONTRARY, THE OCCURRENCE OF AN EVENT OF NON-APPROPRIATION SHALL NOT CONSTITUTE AN EVENT OF DEFAULT AS LONG AS ALL BOND PAYMENT OBLIGATIONS (OTHER THAN WITH RESPECT TO BONDS HELD BY FINANCING FACILITY PROVIDERS) ARE PAID WHEN DUE.
Acceleration of Maturities
During the continuance of an Event of Default described in paragraph (A), (B), (C) (D), or (F) under "Events of Default" above, unless the principal of all the Bonds shall have already become due and payable, the Trustee, upon the written request of the Credit Facility Provider (if any) or the Holders of not less than 66-2/3% in aggregate principal amount of the Bonds at the time Outstanding with the consent of the Credit Facility Provider (if any), or upon the occurrence of an Event of Default described in paragraph (E) under "Events of Default" above, shall, promptly upon such occurrence, by notice in writing to the Authority, the Financing Facility Provider(s) (if any), declare the principal of all the Bonds then Outstanding and the interest accrued thereon, to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in the Indenture or in the Bonds contained to the contrary notwithstanding. Upon any such declaration, the Trustee shall promptly draw upon any then existing Credit Facility in accordance with the terms thereof and apply the amount so drawn to pay any Bond Payment Obligation on the Bonds enhanced by such Credit Facility so declared to be due and payable. Interest on the Bonds shall cease to accrue as of the date of payment thereof. The Trustee, as promptly as feasible following acceleration of the Bonds, shall notify the Bondholders of the date of acceleration and the cessation of accrual of
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interest on the Bonds in the same manner as for a notice of redemption; provided, however, that failure to give such notice shall not affect the acceleration of the Bonds.
The preceding paragraph, however, is subject to the condition that if, at any time after the principal of the Bonds shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, and before the Credit Facility has been drawn upon in accordance with its terms and honored, there shall have been deposited with the Trustee a sum sufficient to pay all the principal of the Bonds matured prior to such declaration and all matured installments of interest (if any) upon all the Bonds, with interest on such overdue installments of principal, and the reasonable fees and expenses of the Trustee, including reasonable fees and expenses of its attorneys, and any and all other defaults known to the Trustee (other than a Bond Payment Obligation due and payable solely by reason of such declaration) shall have been made good or cured to the satisfaction of the Trustee and the Credit Facility Provider (if any) or provision deemed by the Trustee and the Credit Facility Provider (if any) to be adequate shall have been made therefor, then, and in every such case, the Credit Facility Provider (if any) or the Holders of at least a majority in aggregate principal amount of the Bonds then Outstanding, with the written consent of the Credit Facility Provider (if any) and confirmation that the Credit Facility (if any) has been reinstated to the Required Stated Amount, by written notice to the Authority and to the Trustee, may, on behalf of the Holders of all the Bonds, rescind and annul such declaration and its consequences and waive such default; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair or exhaust any right or power consequent thereon. Notwithstanding any other provision of the Indenture except as provided in the following sentence, the Trustee may not exercise any remedy in the event of a default under paragraph (A), (B), (C), (D), or (F) described under "Events of Default" above without the written consent of the Credit Facility Provider (if any), so long as the Credit Facility is in effect and the Credit Facility Provider (if any) is not in default under its payment obligations under the Credit Facility. The Trustee may exercise any and all remedies under the Indenture to collect any fees or expenses due from the Authority to the Trustee without obtaining the consent of the Credit Facility Provider (if any); provided that the Trustee shall first provide written notice to the Credit Facility Provider (if any) of its intent to exercise such remedies and provide the Credit Facility Provider (if any) with an opportunity to cure any failure of the Authority with respect to such fees, expenses and indemnification prior to exercising any such remedy.
Subject to the provisions of the Indenture, if an Event of Default shall occur and be continuing, the Trustee in its discretion may, and upon the written request of the Credit Facility Provider (if any) (if the Credit Facility is in effect and such Credit Facility Provider is not in default under its payment obligations under the Credit Facility) or the Holders of two-thirds in principal amount of the Bonds then Outstanding (with the consent of the Credit Facility Provider, if any, if the Credit Facility is in effect and such Credit Facility Provider is not in default under its payment obligations under the Credit Facility) and upon being indemnified to its satisfaction therefor shall, proceed to protect or enforce its rights or the rights of the Holders of Bonds under the Indenture or the Service Agreement by a suit in equity or action at law, either for the specific performance of any covenant or agreement contained in the Indenture or in the Service Agreement, or in aid of the execution of any power granted in the Indenture or in the Service Agreement, or by mandamus or other appropriate proceeding for the enforcement of any other
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legal or equitable remedy as the Trustee shall deem most effectual in support of any of its rights or duties under the Indenture.
Application of Revenues and Other Funds After Default
If an Event of Default shall occur and be continuing, all Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture (other than payments received from the Credit Facility Provider (if any) and moneys required to be deposited in the Rebate Fund and subject to the requirements of the Indenture relating to the use of moneys held for particular Bonds) shall be applied by the Trustee as follows and in the following order: (A) to the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Holders of the Bonds and payment of reasonable and actual charges and expenses of the Trustee (including reasonable and actual fees and disbursements of its counsel) incurred in and about the performance of its powers and duties under the Indenture including, but not limited to, its rights with respect to the Service Agreement; (B) to any Parity Obligation then due and unpaid (upon presentation of any Bonds to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid), and, if the amount available shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of one such Parity Obligation over another such Parity Obligation, or of any installment of one such Parity Obligation over any other installment of such Parity Obligation, according to the amounts due respectively therefor, to the persons entitled thereto without any discrimination or preference; and (C) to any Financing Facility Payment Obligation not constituting a Parity Financing Facility Payment Obligation then due and unpaid, and, if the amount available shall not be sufficient to pay in full the whole amount so due and unpaid, then to the payment thereof ratably, without preference or priority of one such Financing Facility Payment Obligation over another such Financing Facility Payment Obligation, or of any installment of one such Financing Facility Payment Obligation over any other installment of such Financing Facility Payment Obligation, according to the amounts due respectively therefor, to the persons entitled thereto without any discrimination or preference. Notwithstanding anything to the contrary contained in the Indenture, Subsidy Payments shall only be applied by the Trustee with respect to payments relating to the BABs which generated the Subsidy Payments.
Trustee to Represent Bondholders
The Trustee is irrevocably appointed (and the successive respective Holders of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Trustee) as trustee and true and lawful attorney in fact of the Holders of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Holders under the provisions of the Bonds, the Indenture and applicable provisions of any other law. Upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Trustee to represent the Bondholders, the Trustee in its discretion may, and upon the written request of the Credit Facility Provider (if any) or the Holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding, with the consent of the Credit Facility Provider (if any), and upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of such Holders and the Credit Facility Provider (if any) by such appropriate action, suit, mandamus or other proceedings as it
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shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained in the Indenture, or in aid of the execution of any power granted in the Indenture, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Trustee, in the Credit Facility Provider (if any) or in such Holders and the Credit Facility Provider (if any) under the Indenture, the Act or any other law; and upon instituting such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Trust Estate, pending such proceedings. All rights of action under the Indenture or the Bonds or otherwise may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in the name of the Trustee for the benefit and protection of all the Holders of such Bonds, subject to the provisions of the Indenture.
Credit Facility Provider's and Bondholders' Direction of Proceedings
Anything in the Indenture to the contrary notwithstanding, the Credit Facility Provider (if any) or the Holders of a majority in aggregate principal amount of the Bonds then Outstanding if there is no Credit Facility Provider, shall have the right, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method of conducting all remedial proceedings taken by the Trustee under the Indenture, including, but not limited to, proceedings with respect to the Service Agreement, provided that such direction shall not be otherwise than in accordance with law and the provisions of the Indenture, and that the Trustee shall have the right to decline to follow any such direction that in the opinion of the Trustee would be unjustly prejudicial to Bondholders not parties to such direction.
Limitation on Bondholders' Right to Sue
No Holder of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Indenture or any other applicable law with respect to such Bond, unless (1) such Holder shall have given to the Trustee written notice of the occurrence of an Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers granted in the Indenture or to institute such suit, action or proceeding in its own name; (3) such Holder or said Holders shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (4) the Trustee shall have refused or omitted to comply with such request for a period of 60 days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee.
Such notification, request, tender of indemnity and refusal or omission are declared, in every case, to be conditions precedent to the exercise by any Holder of Bonds of any remedy under the Indenture or under law; it being understood and intended that no one or more Holders of Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Indenture or the rights of any other Holders of Bonds, or to enforce any right under the Indenture or other applicable law with respect to the Bonds, except in the manner provided in the Indenture, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner provided in the Indenture and for the
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benefit and protection of all Holders of the Outstanding Bonds, subject to the provisions of the Indenture.
Absolute Obligation of Authority
Nothing in the Indenture or in the Bonds shall affect or impair the obligation of the Authority, which is absolute and unconditional, to pay any Bond Payment Obligation on the Bonds to the respective Holders of the Bonds at their respective dates of maturity, or upon call for redemption, as provided in the Indenture, but only out of the Trust Estate, or affect or impair the right of such Holders, which is also absolute and unconditional, to enforce such payment by virtue of the contract embodied in the Bonds.
Termination of Proceedings
In case any proceedings taken by the Trustee, the Credit Facility Provider (if any) or any one or more Bondholders on account of any Event of Default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee, the Credit Facility Provider (if any) or the Bondholders, then in every such case the Authority, the Liquidity Facility Provider (if any), the Trustee, the Credit Facility Provider (if any) and the Bondholders, subject to any determination in such proceedings, shall be restored to their former positions and rights under the Indenture, severally and respectively, and all rights, remedies, powers and duties of the Authority, the Liquidity Facility Provider (if any), the Trustee, the Credit Facility Provider (if any) and the Bondholders shall continue as though no such proceedings had been taken.
Remedies Not Exclusive
No remedy conferred upon or reserved to the Trustee, the Liquidity Facility Provider (if any) or the Credit Facility Provider (if any) or to the Holders of the Bonds is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy given under the Indenture or as of the date of effectiveness of the Indenture or thereafter existing at law or in equity or otherwise.
No Waiver of Default
No delay or omission of the Trustee, the Credit Facility Provider (if any), the Liquidity Facility Provider (if any) or of any Holder of the Bonds to exercise any right or power arising upon the occurrence of any default shall impair any such right or power or shall be construed to be a waiver of any such default or an acquiescence therein; and every power and remedy given by the Indenture to the Trustee, the Credit Facility Provider (if any), the Liquidity Facility Provider (if any) or the Holders of the Bonds may be exercised from time-to-time and as often as may be deemed expedient.
Notice to Bondholders of Default
The Trustee shall promptly give written notice by first class mail to the Bondholders and the Financing Facility Provider(s) (if any) of the occurrence of an Event of Default, if the Trustee has actual knowledge of such Event of Default.
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Removal or Resignation of Trustee; Successor Trustee
The Authority may remove the Trustee at any time unless an Event of Default shall have occurred and then be continuing, and shall remove the Trustee if at any time the Trustee shall cease to be eligible in accordance with the Indenture, or shall become incapable of acting, or shall be adjudged as bankrupt or insolvent, or a receiver of the Trustee or its property shall be appointed, or any public officer shall take control or charge of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, in each case by giving written notice of such removal to the Trustee, and thereupon shall appoint, with the written consent of the Credit Facility Provider (if any), a successor Trustee by an instrument in writing.
The Trustee may at any time resign by giving written notice of such resignation to the Authority and the Financing Facility Provider(s) (if any) and by giving the Bondholders notice of such resignation by mail at the addresses shown on the bond registration books maintained by the Trustee. Upon receiving such notice of resignation, the Authority shall promptly appoint, with the written consent of the Credit Facility Provider (if any), a successor Trustee by an instrument in writing. The Trustee shall not be relieved of its duties until such successor Trustee has accepted appointment.
Any removal or resignation of the Trustee and appointment of a successor Trustee shall only become effective upon acceptance of appointment by the successor Trustee. If no successor Trustee shall have been appointed and have accepted appointment within 45 days of giving notice of removal or notice of resignation as aforesaid, the resigning Trustee or any Bondholder (on behalf of himself and all other Bondholders) may petition any court of competent jurisdiction for the appointment of a successor Trustee, and such court may thereupon, after such notice (if any) as it may deem proper, appoint such successor Trustee. Any successor Trustee appointed under the Indenture, shall signify its acceptance of such appointment by executing and delivering to the Authority and to its predecessor Trustee a written acceptance thereof, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become vested with all the moneys, estates, properties, rights, powers, trusts, duties and obligations of such predecessor Trustee, with like effect as if originally named Trustee in the Indenture; but, nevertheless at the Request of the Authority or the request of the successor Trustee, such predecessor Trustee shall execute and deliver any and all instruments of conveyance or further assurance and do such other things as may reasonably be required for more fully and certainly vesting in and confirming to such successor Trustee all the right, title and interest of such predecessor Trustee in and to any property held by it under the Indenture and shall pay over, transfer, assign and deliver to the successor Trustee any moneys or other property subject to the trusts and conditions set forth in the Indenture. Upon request of the successor Trustee, the Authority shall execute and deliver any and all instruments as may be reasonably required for more fully and certainly vesting in and confirming to such successor Trustee all such moneys, estates, properties, rights, powers, trusts, duties and obligations. Upon acceptance of appointment by a successor Trustee as provided in this paragraph, the Authority shall mail a notice of the succession of such Trustee to the trusts under the Indenture to each Rating Agency then rating the Bonds and to the Bondholders at the addresses shown on the bond registration books maintained by the Trustee. If the Authority fails to mail such notice within 15 days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Authority.
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Any Trustee appointed under the provisions of the Indenture in succession to the Trustee shall be a trust company or bank having the powers of a trust company in the Commonwealth of Pennsylvania, having (or if such trust company or bank is a member of a bank holding company system, its bank holding company has) a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by federal or state authority. If such bank or trust company publishes a report of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority above referred to, then for the purpose of this paragraph the combined capital and surplus of such bank or trust company shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this paragraph, the Trustee shall resign immediately in the manner and with the effect specified in the Indenture.
Amendment of the Indenture
The Indenture and the rights and obligations of the Authority and of the Holders of the Bonds and of the Trustee may be modified or amended from time-to-time and at any time by an indenture or indentures supplemental thereto, which the Authority and the Trustee may enter into upon receipt of the written consent of (i) the Credit Facility Provider (if any) (so long as the Credit Facility is in effect or any amounts are owing to the Credit Facility Provider (if any) and the Credit Facility Provider (if any) is not then in default under its payment obligations under the Credit Facility) or (ii) the Holders of a majority in aggregate principal amount of all Bonds then Outstanding (if the Credit Facility is no longer in effect or the Credit Facility Provider (if any) is then in default under its payment obligations under the Credit Facility).
No such modification or amendment shall (1) extend the fixed maturity of any Bond, or reduce the amount of principal thereof, or change the method of computing the rate of interest thereon, or extend the time of payment of interest thereon, or extend the time of payment or reduce the amount of any mandatory sinking fund redemption, or reduce any premium payable upon the redemption thereof, without the consent of the Holder of each Bond so affected, or (2) reduce the aforesaid percentage of Bonds, the consent of the Holders of which is required to effect any such modification or amendment, or permit the creation of any lien on the Trust Estate prior to or on a parity with the lien created by the Indenture, or deprive the Holders of the Bonds of the lien created by the Indenture on such Trust Estate (except as expressly provided in the Indenture), without the consent of the Holders of all of the Bonds then Outstanding, or (3) modify any of the rights or obligations of the Trustee without its prior written consent thereto; nor shall the Trustee be required to consent to any such amendment that adversely affects its rights or obligations under the Indenture or under any Financing Facility.
It shall not be necessary for the consent of the Bondholders to approve the particular form of any Supplemental Indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Authority and the Trustee of any Supplemental Indenture pursuant to the Indenture, the Trustee shall mail a notice, setting forth in general terms the substance of such Supplemental Indenture, to each Rating Agency then rating the Bonds, to the Financing Facility Provider(s) (if any) and to the Holders of the Bonds at the addresses shown on the bond registration books of the Trustee. Any failure to give such notice,
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or any defect therein, shall not, however, in any way impair or affect the validity of any such Supplemental Indenture.
The Indenture and the rights and obligations of the Authority, the Trustee and the Holders of the Bonds also may be modified or amended at any time by a Supplemental Indenture, which the Authority and the Trustee may enter into without the consent of any Bondholders or the Credit Facility Provider (if any), for any one or more of the following purposes (provided the same is not one of the enumerated items described above which requires such consent):
(1) to add to the covenants and agreements of the Authority contained in the Indenture other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds (or any portion thereof), or to surrender any right or power reserved to or conferred upon the Authority in the Indenture;
(2) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision, contained in the Indenture, or in regard to matters or questions arising under the Indenture, as the Authority may deem necessary or desirable and not inconsistent with the Indenture and which do not materially adversely affect the interests of the Holder of the Bonds;
(3) to modify, amend or supplement the Indenture in such manner as to permit the qualification of the Indenture under the Trust Indenture Act of 1939, as amended, or any similar federal statute in effect, and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute;
(4) to make the Bonds eligible for deposit with any securities depository;
(5) to obtain or maintain a rating on the Bonds;
(6) to conform to the terms and provisions of any Financing Facility;
(7) to provide for the issuance of Additional Bonds as permitted by the Indenture;
(8) To release the Debt Service Reserve Fund with respect to any Series of Bonds if such release is approved by any Credit Facility Provider and any Swap Provider which have Financing Facilities relating to such Series of Bonds; or
(9) Any other change which does not materially adversely affect the interests of the Holders of the Bonds.
Discharge of Indenture
The Bonds may be paid by the Authority in any of the following ways, provided that the Authority also pays or causes to be paid any other sums payable under the Indenture by the Authority: (A) by paying or causing to be paid all Bond Payment Obligations, as and when the same become due and payable; (B) by depositing with the Trustee, in trust, at or before maturity, moneys or securities in the necessary amount to pay or redeem all Bonds then Outstanding; or (C) by delivering to the Trustee, for cancellation by it, all Bonds then Outstanding.
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If the Authority shall also pay or cause to be paid all other sums payable under the Indenture by the Authority and no amounts are owing with respect to any Financing Facility Payment Obligations (including any draws on a Credit Facility to pay amounts pursuant to (A) and/or (B) above) to each Financing Facility Provider (if any), then and in that case, at the election of the Authority (evidenced by a Certificate of the Authority, filed with the Trustee, signifying the intention of the Authority to discharge all such indebtedness and the Indenture) and upon receipt by the Trustee and each Financing Facility Provider (if any) of (i) an Opinion or Opinions of Counsel to the effect that the obligations under the Indenture, the Bonds and any Financing Facility Payment Obligations have been discharged and (ii) if the Bond Payment Obligations are not going to be fully paid within 120 days, a verification report prepared by an independent public accountant acceptable to the Trustee as to the sufficiency of the amounts deposited with the Trustee for such defeasance, and notwithstanding that any Bonds shall not have been surrendered for payment, the Indenture and the pledge of the Trust Estate under the Indenture and all covenants, agreements and other obligations of the Authority under the Indenture shall cease, terminate, become void and be completely discharged and satisfied, except only as other provided in the Indenture. In such event, upon Request of the Authority, the Trustee shall cause an accounting for such period or periods as may be requested by the Authority to be prepared and filed with the Authority and shall execute and deliver to the Authority all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee shall pay over, transfer, assign or deliver all moneys or securities or other property held by it pursuant to the Indenture that are not required for the payment or redemption of Bonds not theretofore surrendered for such payment or redemption (1) to each Financing Facility Provider (if any) to the extent of any amounts owed to such Facility Financing Provider (if any) and (2) otherwise, to the Authority; provided that in all events moneys in the Rebate Fund shall be subject to the provisions of the Indenture, and moneys in the Interest Subsidy Payment Subaccount shall be paid to the Commonwealth.
Discharge of Liability on Bond
Upon the deposit with the Trustee, in trust, at or before maturity, of moneys or securities in the necessary amount to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice, then all liability of the Authority in respect of such Bond shall cease, terminate, become void and be completely discharged and satisfied, except only that thereafter the Holder thereof shall be entitled to payment of the Bond Payment Obligation on such Bond by the Authority and the Authority shall remain liable for such payment, but only out of such moneys or securities deposited with the Trustee as aforesaid for its payment; provided further, however, that the provisions described below under "Payment of Bonds After Discharge of Indenture" shall apply in all events.
Deposit of Money or Securities with Trustee
Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Indenture (other than the Rebate
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Fund) and shall be: (A) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity (for periods for which the actual interest rate is not known, based on the assumed interest rate permitted under the applicable Supplemental Indenture or if no such assumed rate is provided, at the maximum rate which may be borne by such Bonds), except that, in the case of Bonds that are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or Redemption Price of such Bonds and all unpaid interest thereon to the redemption date (for periods for which the actual interest rate is not known, based on the assumed interest rate permitted under the applicable Supplemental Indenture or if no such assumed rate is provided, at the maximum rate which may be borne by such Bonds); or (B) Defeasance Securities (not callable by the issuer thereof prior to maturity, unless with respect to such Defeasance Securities, a verification report relating to the escrow that includes such Defeasance Securities is required to be provided under the Indenture and such call by the issuer was anticipated in such verification report) the principal of and interest on which when due (without any income from the reinvestment thereof) will provide money sufficient to pay the Bond Payment Obligation to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed (for periods for which the actual interest rate is not known, based on the assumed interest rate permitted under the applicable Supplemental Indenture or if no such assumed rate is provided, at the maximum rate which may be borne by such Bonds), as such Bond Payment Obligation become due, provided that, in the case of Bonds that are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given or provision satisfactory to the Trustee shall have been made for the giving of such notice; provided, in each case, that the Trustee shall have been irrevocably instructed (by the terms of the Indenture or by Request of the Authority) to apply such money to the payment of such Bond Payment Obligation on such Bonds.
Payment of Bonds After Discharge of Indenture
Notwithstanding any provisions of the Indenture, any moneys held by the Trustee in trust for the payment of any Bond Payment Obligation and remaining unclaimed for five years (or, if less, one day before such moneys would escheat to the Commonwealth under then applicable Commonwealth law) after the principal of all of the Bonds has become due and payable (whether at maturity or upon call for redemption or by acceleration as provided in the Indenture), if such moneys were so held at such date, or five years (or, if less, one day before such moneys would escheat to the Commonwealth under then applicable Commonwealth law) after the date of deposit of such moneys if deposited after said date when all of the Bonds became due and payable, shall be repaid to the Authority (unless such moneys are proceeds of the Credit Facility and moneys are owed to the Credit Facility Provider (if any) by the Authority, in which event to the Credit Facility Provider (if any)) free from the trusts created by the Indenture, and all liability of the Trustee with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the Authority or the Credit Facility Provider (if any) as aforesaid, the Trustee may (at the cost of the Authority) first mail to the Holders of Bonds that have not yet been paid, at the addresses shown on the bond registration books maintained by the Trustee, a notice, in such form as may be deemed appropriate by the Trustee with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment
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to the Authority or the Credit Facility Provider (if any) of the moneys held for the payment thereof.
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APPENDIX C
BOOK-ENTRY ONLY SYSTEM
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C-1
APPENDIX C
BOOK-ENTRY ONLY SYSTEM Unless otherwise noted, the information contained under “General” below has been provided by The Depository Trust Company (“DTC”). Neither the Authority nor the Underwriters make any representation as to the accuracy or the completeness of such information. The Beneficial Owners of the Series 2013 Bonds should confirm the following information with DTC or the DTC Participants. NEITHER THE AUTHORITY, THE TRUSTEE, NOR THE UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DIRECT PARTICIPANTS, INDIRECT PARTICIPANTS, OR ANY BENEFICIAL OWNER WITH RESPECT TO (A) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, ANY DIRECT PARTICIPANT, OR ANY INDIRECT PARTICIPANT; (B) ANY NOTICE THAT IS PERMITTED OR REQUIRED TO BE GIVEN TO THE OWNERS OF THE SERIES 2013 BONDS UNDER THE ENERGY INDENTURE OR THE H2O INDENTURE; (C) THE SELECTION BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY PERSON TO RECEIVE PAYMENT IN THE EVENT OF A PARTIAL REDEMPTION OF THE SERIES 2013 BONDS; (D) THE PAYMENT BY DTC OR ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT OF ANY AMOUNT WITH RESPECT TO THE PRINCIPAL OR REDEMPTION PREMIUM, IF ANY, OR INTEREST DUE WITH RESPECT TO THE OWNER OF THE SERIES 2013 BONDS; (E) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC AS THE OWNERS OF SERIES 2013 BONDS; OR (F) ANY OTHER MATTER RELATING TO DTC OR THE BOOK- ENTRY ONLY SYSTEM. General DTC, New York, NY, will act as securities depository for the Series 2013 Bonds. The Series 2013 Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Series 2013 Bond certificate will be issued for each maturity and interest rate of each series of the Series 2013 Bonds, each in the aggregate principal amount thereof, and will be deposited with DTC or held by the Trustee. DTC DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC. National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com. The Authority, the Trustee, and the Underwriters undertake no responsibility for and make no representation as to the accuracy or the completeness of the content of such material contained on DTC’s website as described in the preceding sentence including, but not limited to, updates of such information or links to other Internet sites accessed through the aforementioned website.
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Book-Entry System Purchases of the Series 2013 Bonds under the DTC system must be made by or through Direct which will receive a credit for the Series 2013 Bonds on DTC’s records. The ownership interest of each actual purchaser of each Series 2013 Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2013 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the Series 2013 Bonds, except in the event that use of the book-entry system for the Series 2013 Bonds is discontinued. To facilitate subsequent transfers, all Series 2013 Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2013 Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2013 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2013 Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. While the Series 2013 Bonds are in the book-entry system, redemption notices will be sent to DTC. If less than all of the Series 2013 Bonds within a maturity and interest rate of a series are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity and interest rate to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Series 2013 Bonds unless authorized by a Direct Participant in accordance with DTC’s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts the Series 2013 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal, premium and interest payments on the Series 2013 Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participant’s’ accounts upon DTC’s receipt of funds and corresponding detail information from the Authority or the Trustee on the payable date in accordance with their respective holdings shown on DTC’s records. Payments by Direct and Indirect Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Direct and Indirect Participant and not of DTC, the Trustee, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. Discontinuance of Book-Entry System DTC may discontinue providing its services as securities depository with respect to the Series 2013 Bonds at any time by giving reasonable notice to the Authority. Under such circumstances, in the event that a successor securities depository is not obtained, certificates representing the Series 2013 Bonds are required to be printed and delivered as provided in the Energy Indenture and the H2O Indenture, as applicable. The Authority may decide to
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discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates representing the Series 2013 Bonds will be printed and delivered to DTC. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the Authority believes to be reliable, but neither the Authority nor the Underwriters take any responsibility for the accuracy thereof.
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APPENDIX D-1
FORM OF ENERGY SERVICE AGREEMENT
[This Page Intentionally Left Blank]
SERVICE AGREEMENT
BETWEEN
COMMONWEALTH FINANCING AUTHORITY
AND
THE COMMONWEALTH OF PENNSYLVANIA
Relating to the Financing and Implementation of the Alternative Energy Development Program undet· the
Alternative Energy Investment Act
Dated as of May 1, 2009
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TABLE OF CONTENTS
Page No.
I. Definitions ........................................................................................................................................ 2 2. Tenn ................................................................................................................................................. 2 3. Authority Undertaking; Payment of Service Fee by Department. ................................................... 2 4. Assigrunent of Service Fee to Trustee ............................................................................................. 5 5. Termination of Obligation to Pay Service Fee ................................................................................. 6 6. The Department to Provide for Payment of the Service Fee from its Annual Budget.. ................... 6 7. Issuance of Additional Bonds .......................................................................................................... 6 8. Federal Tax Covenants ..................................................................................................................... 6 9. Representations of the Authority ..................................................................................................... 7 I 0. Representations of the Department. ........................................... · ...................................................... 7 II. Consent of the Secretary of the Budget.. .......................................................................................... 7 12. The Department's Certificate ........................................................................................................... 7 13. Defaults and Remedies ..................................................................................................................... 8 14. Recordation ...................................................................................................................................... 9 I5. ChoiceofLaw .................................................................................................................................. 9 16. Notices ............................................................................................................................................. 9 I7. Cooperation in Filing Reports ........................................................................................................ 10 18. . An1endments and Supplements ...................................................................................................... 1 0 19. Provisions Separate .................. : ....................... _ .............................................................................. 11 20. Execution in Counterparts .............................................................................................................. II 21. Schedules and Exhibits ........................................................................................... .' ...................... 11 22. Descriptive Headings ..................................................................................................................... II 23. Binding Effect, Permitted Assigns ................................................................................................. II 24. Miscellaneous ................................................................................................ : ................................. ll
Exhibit A -- Obligation Payment Schedule
PHILADELPHIA\4022009\4 232183.000
SERVICE AGREEMENT
This SERVICE AGREEMENT dated as of May 1, 2009 (the "Service Agreement"),
between THE COMMONWEALTH FINANCING AUTHORITY (the "Authority"), an
instrumentality of the Commonwealth of Pennsylvania and a body corporate and politic organized and existing under Pennsylvania law, and the COMMONWEALTH. OF PENNSYLVANIA (the
"Cornn1onwealth") acting through the Department of Community and Economic Development (the
"Department");
WITNESSETH
WHEREAS, the Authority was created pursuant to 64 P.C.S. Section 1501 et seq. (as amended from time to time, the "Act") for the purpose of, among other things, providing financial
assistance for certain programs; and
WHEREAS, pursuant to 73 P.S. Section 1649.101 et seq. (the "Alternative Energy Act"), the Authority is respon?ible for administering the Alternative Energy Development Program (the "Program") established thereby; and
WHEREAS, pursuant to Section 1511(1) of the Act, the Authority may enter into agreements with the Department setting forth the rights and obligations they have to each other in carrying out their respective responsibilities under, and to further the intent of, the Act; and
WHEREAS, the Alternative Energy Act provides for the issuance of up to $500,000,000 of indebtedness of the Authority (plus amounts required for financing costs) in accordance with the Act to
. fund the Program; and
WHEREAS, the Alternative Energy Act further provides that an amount not to exceed $40,000,000 per fiscal year through the fiscal year ending June 30, 2038, will be appropriated for payment of debt service on indebtedness issued by the Authority to finance the Program; and
WHEREAS, in accordance with the Act and the Alternative Energy Act, the Authority has authorized the issuance of its Fixed Rate (Federally Taxable) Revenue Bonds, Series A of 2009 (the "2009 Series A Bonds") in an aggregate principal amount of $50,000,000 and its Fixed Rate (Tax-Exempt) Revenue Bonds, Series B of 2009 (the "2009 Series B Bonds," and collectively with the 2009 Series A Bonds, the "2009 Bonds") in an aggregate principal amount of $50,000,000, to fund in part
the Program and the costs of issuing the 2009 Bonds (the "Project"); and
WHEREAS, in order to provide for the authentication and delivery of the 2009 Bonds, to
establish and declare the terms and conditions upon which the 2009 Bonds are to be issued and secured and to secure Obligations (as defined in the Indenture described below), the Authority has authorized the
execution and delivery of the Trust Indenture (the "Indenture") dated as of May 1, 2009 between the Authority and TO Bank, National Association (the "Trustee"); and
WHEREAS, payment of the principal of and interest on the 2009 Series B Bonds when
due is being insured by a municipa! bond insurance policy issued by Assured Guaranty Corp. (the
"Insurer"); and
WHEREAS, pursuant to Section 1511 of the Act, the Authority is an independent
authority and an instrumentality of the Commonwealth and a body corporate and politic; and
PHILADELPHIA\4022009\4 232183.000
WHEREAS, pursuant to Section 1513(a)(8) of the Act, the Authority may enter into contracts, which are necessary or appropriate for carrying on the business of the Authority; and
WHEREAS, pursuant to Section 1521 (d) of the Act, the Department may not be made responsible for the payment of obligations of the Authority except for funds appropriated by the Commonwealth to the Authority for repayment of Obligations; and
WHEREAS, pursuant to the Act, the Authority is pem1itted to incur and pay administrative expenses of the Authority in order to enable the Authority to operate and administer its programs and perform its functions {including, but not limited to, the payment of any amounts into the Rebate Fund pursuant to Section 4.07 of the Indenture} as contemplated by the Act (the "Administrative Expenses").
NOW, THEREFORE, in consideration of the mutual agreements hereinafter contained, the parties hereto, intending to be legally bound hereby, agree as follows:
1. Definitions.
The terms defined in the foregoing recitals and clauses shall have the meanings specified therein. All capitalized terms that are used herein but that are not defined herein, and that are defined in the Indenture, shall have the same meaning herein as in the Indenture
2. Term.
The "Term" of this Service Agreement shall commence on May 14, 2009, and shall end on the later of: (i) close of business on June 1, 2031, or (ii) the date on which there are no longer any Obligations Outstanding; ·provided, however, that the term of this Service Agreement shall be automatically extended without the necessity for any further act or deed, for such time as may be necessary to accomplish any of the following purposes, plus thirty (30) days:
(a) To enable the Authority to comply with any covenant, condition, term or provision of any agreement to which it is a party, or
(b) To enable the Department or the Authority to comply with any covenant, condition, term or provision of the Indenture (including, but not limited to, the obligation to make payments on any Obligation), or any other agreement or contract entered into by such party with the consent of the other party.
Either party hereto shall, at the request of the other party hereto (or at the request of the Trustee), enter into such written instrument or instruments as are required in order to memorialize and carry out the effect and intent of the foregoing subsections (a) and (b), notwithstanding that the foregoing provisions are intended to be fully effective without doing so.
3. Authority Undertaking; Payment of Service Fee by Department.
(a) The Authority agrees with the Department that it shall administer the Program as required by the Altemative Energy Act.
(b) The Department covenants that it will seek appropnatwns from the Legislature in amounts sufficient to pay the Service Fee, as hereinafter defined and to cause such appropriations to be paid directly to the Authority or its assignee. The Department further covenants that it will submit the request for such appropriations to the Secretary of the Budget (the "Secretary") in a timely manner. The Department further covenants that it will use its best efforts to have the Governor of the Commonwealth
PHILADELPHIA\4022009\4 232183.000 2
request the Legislature to include in its a1mual budget an amount for payment of the Service Fee when
due pursuant to subsection (c) below, equal to the aggregate amount specified in the Annual Service Fee
Estimate for the fiscal year of the Department covered by such budget request.
(c) The Department shall pay to the Authority (for deposit in the Revenue Fund), as a service
fee (the "Service Fee") hereunder, subject to the annual appropriation by the Legislature of sufficient funds to pay such Service Fee, an aggregate amount equal to the sum of the following amounts (each a
"Service Fee Component"):
(i) no later than May I and November I of each year, the amount of the Bond Payment Obligations necessary to enable the Trustee to pay all interest on Bonds coming due on the
next Interest Payment Date (and any cumulative amounts which remain unpaid) as set forth on Exhibit A attached hereto (Exhibit A, as it may be amended from time to time pursuant toSection 7 hereof, being hereinafter called the "Obligation Payment Schedule");
(ii) no later than May 1 of each year, the amount of the Bond Payment Obligations (and any cumulative amounts which remain unpaid) necessary to enable the Trustee to make the principal payment on the Bonds (including payment obligations on any mandatory bond redemptions) scheduled to be made during such fiscal year of the Department as set forth in the Obligation Payment Schedule;
(iii) as required to make timely payment thereof, the amount necessary to make up any deficiency in the Debt Service Reserve Fund, if any, that is required to be funded by the Department pursuant to Section 4.05 of the Indenture;
(iv) as required to make timely payment thereof, the amount necessary to be provided by the Authority in order to enable the Trustee to make the full amount of any payment when due (and any cumulative amounts which remain unpaid) on other Obligations (including Financing Facility Payment Obligations);
(v) as required to make timely payment thereof, any amounts required to be deposited in the Rebate Fund under the Indenture; and
(vi) as required to make timely payment thereof, the amount necessary for Administrative Fees and Expenses.
(d) In order to enable the Legislature to appropriate sufficient funds to enable the Department to make the Service Fee payments when they come due hereunder, the Department agrees that it shall notify the Secretary, in writing, no later than each October I or, in the case cif the Department's 2010
fiscal year, by May 14, 2009 (or, if the final day of the Department's fiscal year changes to a day other than June 30, then no later than two hundred seventy (270) days prior to the beginning of each of the Department's subsequent fiscal years), during the term of this Service Agreement (commencing with the
Department's 2010 fiscal year) of the estimated amounts of the Service Fee and the Service Fee
Components for the following fiscal year; provided, however, that if the Department shall fail to deliver
to the Secretary such Service Fee payment estimate on or prior to the last date specified above for such delivery, then it shall conclusively be deemed that the Service Fee payments to be made in the next
following fiscal year of the Department shall be the same as the amount of the Service Fee appropriated
for the current fiscal year. (The estimate of the Service Fee hereunder required to be paid in any fiscal
year of the Department described in the immediately preceding sentence is hereinafter called the "Annual
Service Fee Estimate").
PHILADELPHIA \4022009\4 232183.000 3
(e) The Department also agrees to notify the Secretary, in writing, at least one hundred . twenty ( 120) days prior to the due date of each Service Fee payment hereunder, as to the amount of funds that will be required from the Commonwealth (in addition to any other monies that will be available for such purpose in the Revenue Fund) in order to enable the Trustee to make all Service Fee payments coming due prior to the next scheduled Service Fee payment date hereunder; provided, however, that if the Department shall fail to deliver such notice to the Secretary on or prior to the last date specified above for such delivery, then it shaH be conclusively deemed that the Service Fee payment required from the Commonwealth at that time is the same as the estimate thereof in the pertinent Annual Service Fee Estimate.
(f) In the event that the Service Fee paid by the Department hereunder for any of its fiscal years shall exceed the actual Service Fee Components paid by the Trustee and the Authority during such fiscal year, then the Authority shall cause the Trustee to accumulate and hold such excess in the Revenue Fund in accordance with all applicable arbitrage requirements, and such excess and interest earned thereon (except any such interest which is required to be transferred to the Rebate Fund) shall be applied as a credit against the next year's Service Fee.
(g) The Department's obligation to pay the Service Fee hereunder shall survive the termination of this Service Agreement and shall otherwise continue in full force and effect until all of the 2009 Bonds and other Obligations have been defeased and/or satisfied and all of the payment obligations of the Authority to the Holders of the Bonds and holders of any other Obligations have been met. Subject only to the appropriation of funds for .Service Fee payments hereunder by the Legislature as set forth in subsection (c) above, the obligation of the Department to pay the Service Fee shall be absolute and unconditional, and the Service Fee shall be paid without notice or demand (unless notice or demand is expressly provided for in this Service Agreement), counterclaim, set-off, defense, abatement, suspension or deferment, and without deduction, diminution or reduction o(any kind or amount or for any reason. Without in any way limiting the foregoing, the obligations and liabilities of the Department hereunder to pay the Service Fee shall in no way be released, reduced, discharged or otherwise affected by reason of:
(i) Any payment made on behalf of the Department by reason of the Department's failure to meet one or more of its obligations hereunder, including (but not limited to) any payment by the Trustee from the Debt Service Reserve Fund because the Department has not made one or more payments ofthe Service Fee hereunder when due;
(ii) Any bankruptcy, insolvency, reorganization, composJIIon, adjustment, dissolution, liquidation or other like proceeding relating to the Authority, or any action taken with respect to this Service Agreement by any trustee or receiver of the Authority, or by any court, in any such proceeding;
(iii) Any claim (whether by way of set-off, recoupment, counterclaim or otherwise) which the Department, the Commonwealth, the Secretary or anyone else has or might have against the Authority under this Service Agreement, the Indenture or otherwise; ·
(iv) Any failure on the part of the Authority to perform or comply with any of the terms of this Service Agreement or any other agreement with the Department, or of the Indenture or any agreement to which the Authority is a party;
(v) Any failure of the Authority or the Trustee to perform or observe any agreement or covenant, whether express or implied, or any duty, liability or obligation arising out of or connected with this Service Agreement, the Indenture or the 2009 Bonds;
PHILADELPHIA\4022009\4 232183.000 4
· (vi) Any failure of consideration, failure of title or conm1crcial frustration of
.purpose;
(vii) Any change in the tax or other laws of the United States of An1erica or of
any state or other governmental authority;
(viii) Any determination that interest on any 2009 Series B Bond is includable
in the gross income of the Holder of such 2009 Series B Bonds for purposes of federal income taxation;
and
(ix) Any other occurrence whatsoever, whether similar or dissimilar to the
foregoing and whether or not either or both of the Department and the Authority shall have notice or
knowledge of any of the foregoing.
The Department shall not limit or alter the rights vested by the Act or the Alternative Energy Act in the
Authority (if such limitation or alteration would adversely affect the rights of the Trustee or the
Bondholders, or both of them) until all 2009 Bonds and other Obligations at any time issued pursuant to
the Indenture, together with interest thereon, are fully paid and discharged. The Department expressly
waives all rights now or hereafter conferred by statute or otherwise if and to the extent that such rights
allow the Department to quit, terminate or surrender this Service Agreement or any part thereof, or entitle
the Department to any abatement, suspension, deferment, diminution or reduction of the service fee
payable by the Department hereunder.
(h) Time shall be of the essence of this Service Agreement with respect to the Department's
obligations under this Section and with respect to Section I7 hereof.
4. Assignment of Service Fee to Trustee.
Contemporaneously with execution hereof, the Authority is executing and delivering the
Indenture and is thereby selling, assigning, transferring, setting over and pledging unto the Trustee (for
the benefit and security of the Holders of the Bonds and other Obligations) all ofthe Authority's right,
title and interest in and to the Service Fee payable to the Authority hereunder (other than the Service Fee
. Component constituting Administrative Expenses) in order to secure the payment of the Bonds and
certain other Obligations to be issued or entered into pursuant to the Indenture, and the Trustee shall be
deemed to be a third party beneficiary of this Service Agreement. The Department hereby consents to the
provisions of the immediately preceding sentence, including the assignment of the Service Fee payable
(other than the Service Fee Component constituting Administrative Expenses) by it hereunder to the
Trustee, and agrees to make all payments of the Service Fee hereunder (other than the Service Fee
Component constituting Administrative Expenses) directly to the Trustee (on behalf of the Authority)
unless and until the Department receives written notification that such assignment has been terminated.
Such Service Fee payments shall be made to the Trustee at the following address: TD Bank, National
Association, I 0 I North Second Street, Harrisburg, PA 17I 01, Attn: Corporate Trust Department, unless
and until such address for payment shall be changed by written notice from the Trustee. The Authority,
for itself, its successors and assigns, agrees for the benefit of the Department (and the Indenture shall so
require) that the Trustee will deposit the Service Fee and other monies (if any) received by it from the
Department hereunder in the Revenue Fund (or, if to restore the Debt Service Reserve Fund, in the Debt
Service Reserve Fund), or to be used in the manner specified in the Indenture for the payment of the Bond
Payment Obligations on the then Outstanding Bonds and other Obligations and for any other purposes
permitted by the Indenture and this Service Agreement; provided that this sentence shall not preclude the
deposit or retention of such monies in reserve funds (or other similar funds and accounts) established
under the Indenture pending the payment of the Bonds and other Obligations.
PHILADELPHIA\4022009\4 232183.000 5
5. Termination of Obligation to Pay Service Fee.
If and when there are sufficient funds available to the Trustee, within the funds held by
the Trustee for such purposes, to make the full payments of the Bond Payment Obligations and all other
Obligations under the Indenture, the Department shall be relieved of making any further payments of the
Service Fee hereunder; and from and after such time, the Authority may elect, on not less than ten (1 0)
days prior written notice to the Department, the Trustee and the Insurer, to tem1inate this Service
Agreement.
6. The Department to Provide for Payment of the Service Fee from its Annual Budget.
The Department agrees that, until the Department is no longer obligated to pay the
Service Fee under this Service Agreement that the Department will include the Service Fee in its annual
budget request submitted to the Governor of the Commonwealth. The Department acknowledges that its
covenant in the immediately preceding sentence is a material term of this Service Agreement the breach
of which constitutes a default entitling the Authority to obtain damages for each such breach in an amount
equal to the amount of the Service Fee payable in accordance with the applicable Annual Service Fee
Estimate together with interest thereon at the rate of interest payable on the Bonds and other Obligations
between the date on which such Service Fee payment is due and the date on which such payment of the
Service Fee and the interest thereon is actually made by the Department.
7. Issuance of Additional Bonds.
If and when Additional Bonds or other Obligations are issued pursuant to the Indenture
and the Department shall have approved the issuance of such Additional Bonds or other Obligations (if
such approval is then required by the Act or the Indenture), the Authority shalL provide the Department
with a revised Obligation Payment Schedule that will include the payment dates for both the Bonds and
other Obligations that had theretofore been issued and that continue to be Outstanding and the Additional
Bonds and other Obligations that are then being issued, and (upon delivery of such revised Obligation
Payment Schedule to the Department) it shall thereafter be deemed to be the operative Obligation
Payment Schedule in lieu of the prior one and Exhibit A hereto will be deemed to be automatically
amended thereby without. the necessity for any further act or deed.
8. Federal Tax Covenants.
(a) Interest on the 2009 Series B Bonds being issued contemporaneously with the execution
hereof is intended to be excludable from the gross income of the Holders of the 2009 Series B Bonds for
federal income tax purposes. The Authority and the Department hereby covenant, for the benefit of the
Holders from time to time of the Bonds including the 2009 Series B Bonds which are intended to have
interest excluded from gross income for purposes of federal income taxation (such intent to be indicated
in the document offering such Bonds at the time of issuance), that the Authority and the Department shall
at all times do and perform all acts and things necessary and desirable in order to assure that interest paid
on such Bonds including the 2009 Series B Bonds shall, for purposes of federal income taxation, be and
remain excludable from the gross income of the recipients thereof and that they will refrain from doing or
performing any act or thing that will cause such interest not to be so excludable.
(b) The Authority and the Department hereby covenant, for the benefit of the Holders from
time to time of the Bonds including the 2009 Series B Bonds which are intended to have interest excluded
from gross income for purposes of federal income taxation (such intent to be indicated in the document
offering such Bonds at the time of issuance), that the Authority and the Department will not make any
investment or other use of the "proceeds" (as that term is defined in Section 148 of the Code) of such
Bonds including the 2009 Series B Bonds which would cause such Bonds to be "arbitrage bonds" (as that
PHILADELPHlA\4022009\4 232183.000 . 6
tennis defined in Section 148 of the Code), and that they will comply with the requirements of such Code
Section and regulations throughout the term of such Bonds.
(c) The Authority and the Department hereby covenant, for the benefit of the Holders from
time to time of the Bonds including the 2009 Series B Bonds which are intended to have interest excluded
from gross income for purposes of federal income taxation (such intent to be indicated in the document
offering such Bonds at the time of issuance), that the Authority and the Department will comply with the
requirement for rebate to the United States as described (along with other requirements) in the Tax
Certificate.
(d) The provisions of this Section shall survive the termination of this Service Agreement.
9. Representations of the Authority.
The Authority represents, covenants and agrees that, as of the date of this Service Agreement:
(a) it has full right, power and authority to execute this Service Agreement for the Term and on the
conditions herein contained; and (b) it has full right, power and authority to perform all of its obligations
and duties hereunder.
10. Representations of the Department.
The Department represents, covenants and agrees that, as of the date of this Service Agreement:
(a) it has full right, power and authority to execute this Service Agreement and to perform its obligations
and duties hereunder; and (b) the Department's execution and delivery hereof and performance of its
obligations hereunder have been duly authorized, arc the legal, valid and binding obligations of the
Department (enforceable in accordance with their terms) and do not conflict with or constitute a breach
under any law, regulation, ruling, order or instrument by which the Department is bound or to which the
Department or its properties are subject.
11. Consent of the Secretary of the Budget.
The Secretary covenants that, until the Department is no longer obligated to pay the Service Fee
under this Service Agreement, the Secretary will use his best efforts to cause to be included in the annual
budget submitted by the Governor of the Commonwealth to the Legislature, an amount, for payment of
the Service Fee when due pursuant to Section 3(c) hereof, equal to the aggregate amount specified in the
Annual Service Fee Estimate for the fiscal year of the Department covered by such budget request. If
such annual budget is not passed by June 30 of such fiscal year, the Secretary covenants to use his best
efforts to include such Service Fee in a supplemental appropriation.
12. The Department's Certificate.
The Department agrees that, at any time and from time to time, within thirty (30) days after
written request from the Authority or the Trustee to do so, the Department will execute, acknowledge and
deliver to the entity making such request a written instrument in recordable fonn certifying that this
Service Agreement is unmodified and in full force and effect (or if there have been modifications, that it
is in full force and effect as modified and stating the modifications), and the dates to which the Service
Fee has been paid in advance, if any, and stating whether or not to the best knowledge of the signer of
such certificate the Authority is in default in the performance of any covenant, agreement or condition
contained in this Service Agreement and, if so, specifying each such default of which the signer may have
knowledge, it being intended that any such statement delivered pursuant to this Section may be relied
upon by any prospective transferee of the Authority's interest in this Service Agreement.
PHILADELPHIA\4022009\4 232183.000 7
13. Defaults and Remedies.
(a) Except as is otherwise provided in subsection (d) below, (i) if the Department fails to pay
the full amount of the Service Fee payment when due hereunder; or (ii) if the Department fails to comply
with its obligations set forth in the first sentence of Section 6 hereof; or (iii) if the Department fails to
perform any other covenant, condition or agreement hereunder within thirty (30) days after the Authority
or the Trustee has given the Department written notice requiring the same to be performed; or (iv) if the
Conunonwealth shall be adjudicated as bankrupt, or shall make an assignment for the benefit of creditors
or shall file a bill in equity or otherwise initiate proceedings for the appointment of a receiver of the
Conunonwealth's assets, or shall file any proceeding in bankruptcy or for reorganization or an
arrangement under any federal or state law; or (v) if any proceeding in bankruptcy or for the appointment
of a receiver shall be instituted by any creditor of the Commonwealth under any state or federal law, and
such proceeding has not been terminated within sixty (60) days after its institution (the occurrence of any
such event constituting an event of default and a breach under this Service Agreement), then and in
addition to any other rights or remedies the Authority may have under this Service Agreement and at law
and in equity, the Authority shall have the following rights:
(I) To recover from the Department all monies that are not paid when due, together
· with interest on the unpaid balance, at the rate of interest payable on the Bonds and other Obligations,
between the date when each such sum is due and the date on which the Department actually pays such
sum and interest thereon; and
(II) To obtain specific performance of the Department's obligations under this
Service Agreement.
(b) No right or remedy herein co11ferred upon or reserved to the Authority is intended to be
exclusive of any other right or remedy herein or by law or in equity provided, but each shall be
cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law,
in equity or by statute. The Authority a·grees that it shall not exercise any of its rights or remedies under
subsection (a) above with respect to the 2009 Series B Bonds prior to obtaining the Insurer's consent
thereto, and the parties hereto acknowledge that the Insurer shall have the right to exercise all of the
Authority's rights and remedies under subsection (a) above (on the Authority's behalf) with respect to the
2009 Series B Bonds if and to the extent that the Indenture so provides; provided, however, that such
consent by the Insurer shall not be required during the pendency of any default by the Insurer with respect
to its obligations or duties under its municipal bond insurance policy covering the 2009 Series B Bonds.
(c) No waiver by the Authority of any breach by the Department of any of the Department's
obligations, agreements or covenants herein shall be a waiver of any subsequent breach or of any
obligation, agreement or covenant, nor shall any forbearance by the Authority to seek a remedy for any
breach by the Department be a waiver by the Authority of any rights and remedies with respect to such or
any subsequent breach. ·
(d) Notwithstanding any proviSion of subsection (a) above to the contrary, it shall be a
defense to the failure of the Department to pay the Service Fee when due hereunder if and to the extent
that such failure occurs because the Legislature has not appropriated sufficient money in the Department's
annual budget for this purpose to enable the Department to pay such Service Fee, even though the annual
budget request of the Department submitted to the Legislature for this purpose did include sufficient
funds to make such Service Fee payments in fulL
PHILADELPHIA \4022009\4 23 2183.000 8
14. Recordation.
At the election of the Authority, either a copy of this Service Agreement or a memorandum hereof (in a form acceptable to the Department) shall be recorded in the appropriate public office(s) specified by the Authority.
15. Governing Law.
This Service Agreement shall be construed according to and govemed by the laws of the Commonwealth of Pe1msylvania.
16. Notices.
All notices required or authorized to be given by the Authority or the Department pursuant to this Service Agreement shall be in writing and shall be sent by registered or certified mail, postage prepaid, or by a nationally recognized commercial overnight delivery service guaranteeing next-day delivery, to the following addresses:
(a) To the Authority, to:
Commonwealth Financing Authority Department of Community and Economic Development Commonwealth Keystone Building 400 North Street, 4111 Floor Harrisburg, PA 17120 Attention: Scott Dunkelberger, Executive Director
with a copy to its Chief Counsel, at the same address
(b) To the Department, to:
Department of Community and Economic Development Commonwealth Keystone Building 400 North Street, 4111 Floor · Harrisburg, PA 17120 Attention: Scott Dunkelberger, Executive Director
with a copy-to its Chief Counsel at:
Commonwealth Keystone Building 400 North Street, 4111 Floor Harrisburg, PA 17120 Attention: Steve Fislunan, Esquire, Chief Counsel
PHILADELPHIA\4022009\4 232183.000 9
(c) To the Insurer, to:
Assured Guaranty Corp. 1325 A venue of the Americas New York, New York 10019 Attn: Risk Management Department -Public Finance Surveillance
(Re: Policy No. D-2009-659) TelecopyNo.: (212) 581-3268 Confinnation: (212) 974-0100 Email: [email protected]
(d) To Standard & Poor's Corporation, to:
Standard & Poor's Corporation 25 Broadway, Fiftieth Floor New York, NY 10004 Attention: Public Finance
(e) To Moody's Investors Service, to:
Moody's Investors Service 99 Church Street New York, NY 10007 Attention: Bond Insurance Department
(f) To Fitch Ratings, to:
Fitch Ratings One State Street Plaza New York, NY 10004 Attn: Public Finance
or to such other addresses as may, from time to time, be furnished to the parties, effective upon the receipt
of notice thereof given as set forth above. A courtesy copy of each notice given pursuant to this Service
Agreement shall be sent to the Insurer pursuant to the foregoing provisions at the same time such notice is
given by one of the parties hereto to the other.
17. Cooperation in Filing Reports.
The Department agrees that it will cooperate with the Authority in the preparation and filing of
any information, report or other document with respect to the Bonds or any series of Bonds which may at
any time be required, in the judgment of the Authority or the Trustee to be filed with the Internal Revenue
Service pursuant to federal income tax laws.
18. Amendments and Supplements.
Except as is otherwise provided in Section 7 hereof, this Service Agreement may be amended or
supplemented only by an instrument in writing signed by both of the parties hereto and, if so required by
. the Indenture (including, but not limited to, Section 2.20 thereof), approved or consented to by any or all
of the Trustee, the Bondholders and the Financing Facility Provider. The parties hereto hereby agree to
provide the Rating Agencies with a copy of any such amendment or supplement to which the Insurer shall
have granted its consent.
PHILADELPHIA \4022009\4 232183.000 10
19. ProYisions Separn te.
In the event that any provision hereof (other than Sections 3 and 17 hereof) shall be held to be
invalid, such invalidity shall not affect any other provision hereof, and the remaining provisions hereof
shall be construed and enforced as if such invalid provision had not been contained herein.
20. Execution in Counterparts.
This Service Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original as against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Service Agreement shall become binding when any
one or more counterparts hereof individually or taken together, shall bear the signatures of the Authority
and the Department.
21. Schedules and Exhibits.
All Schedules and Exhibits to this Servic~ Agreement are incorporated within this Service
Agreement and constitute a part thereof.
22. DescriptiYe Headings.
Descriptive headings of the several Sections of this Service Agreement and any Table of Contents
are intended for convenience only and shall not control or affect the meaning or construction of any of the
provisions hereof.
23. Binding Effect, Permitted Assigns.
This Service Agreement shall be binding upon and shall inure to the sole benefit of the parties
hereto, their respective successors and pennitted assigns, and the Trustee (for the benefit of the Holders of
the Bonds). No party may assign any of its rights or delegate any of its obligations hereunder if such
action would be in violation of the Indenture, without the consent of the other party and the Trustee, and
any such purported assignment or delegation shall be void.
24. Miscellaneous.
Each and every covenant and agreement contained herein is, and shall be constmed to be, a
separate and independent covenant and agreement. All rights and remedies given or granted to either
party in this Service Agreement are cumulative, nonexclusive and in addition to any and all rights and
remedies that such party may have or be given at law, in equity or otherwise. No failure by either party to
insist upon strict perfonnance of this Service Agreement or to exercise any remedy upon the occurrence
of an event of Default shall constitute a waiver of such Default, or a waiver cir modification of any
provision of this Service Agreement, and, ·likewise, no prior course of dealing between the parties hereto
shall constitute a waiver of such Default or waiver or .modification of any provision of this Service
Agreement. Upon the occurrence of a Default, the Authority or the Department, as the case may be, may
exercise any one or more of the remedies available to it separately or concurrently and as often as
required to enforce the other party's obligations. In addition to the other remedies provided in this
Service Agreement, the Authority and the Department shall each be entitled to the restraint, by injunction·,
of the violation (or the attempted or threatened violation) by the other party of any of the covenants,
conditions or provisions of this Service Agreement, and to a decree compelling specific performance of
any such covenants, conditions or provisions. This Service Agreement constitutes the entire agreement of
the parties with respect to the administration of the Program and the Service Fee and may not be changed,
modified or terminated except in accordance herewith.
The Insurer is explicitly recognized as being a third party beneficiary hereunder and may enforce
any right, remedy or claim conferred, given or granted hereunder with respect to the 2009 Series B Bonds.
PHILADELPHIA \4022009\4 232183.000 11
IN WITNESS WHEREOF, the parties have caused this Service Agreement to be execute by their
duly authorized officers and their corporate seals to be hereunto affixed and duly attested, as of the day
and year first above written.
COMMONWEALTH FINANCING AUTHORITY
Bys~a~r= Executive Dtrector
Attest:
Secretary
COMMONWEALTH OF PENNSYLVANIA, acting
through the Department of Community and Economic
Development
By:. _____________________________ __
Attest:
Secretary of Community and Economic Development
Chief Counsel, Department of Community
and Economic Development
The Secretary hereby agrees to comply with the provisions of Section 11 of this Service
Agreement.
PHILADELPHIA\4022009\4 2321&3.000
COMMONWEALTH OF PENNSYLVANIA, acting
through the Office of the Budget
By: ______________ _
Secretary of the Budget
Attest:
Chief Counsel, Office of the Budget
[Signature Page to Service Agreement]
IN WITNESS WHEREOF, the parties have caused this Service Agreement to be execute by their
duly authorized officers and their corporate seals to be hereunto affixed and duly attested, as of the day
and year first above written.
COMMONWEALTH FINANCING AUTHORITY
By: ______________ _
Executive Director
Attest:
Secretary
. COMMONWEALTH OF PENNSYLVANIA, acting
through the Department of Community and Economic
Development
By:~~~~ Economic Development
The Secretary hereby agrees to comply with the provisions of Section . 11 of this Service
Agreement.
PHILADEI.PHlA\4022009\4 232183.000
COMMONWEALTH OF PENNSYLVANIA, acting
through the Office of the Budget
By: _______________ _
Secretary of the Budget
Attest:
Chief Counsel, Office of the Budget
[Signature Page to Service Agreement]
IN WITNESS WHEREOF, the parties have caused this Service Agreement to be execute by their
duly authorized officers and their corporate seals t<? be bereunto affixed and duly attested, as of the day
and year first above written.
COMMONWEALTH FINANCING AUTHORITY
By: ______________ _
Executive Director
Attest:
Secretary
COMMONWEALTH OF PENNSYLVANIA, acting
through the Department of Corrununity and Economic
Development
By: ______________ _
Attest:
Secretary of Community and Economic Development
Chief Counsel, Department of Community
and Economic Development
The Secretary hereby agrees to comply with the provisions of Section 11 of this Service
Agreement.
PHILADELPHIA \4022009\4 232183.000
Attest:
Chief Counsel, Office of the Budget
[Signature Page to Service Agreement]
IN WITNESS WHEREOF, the parties have caused this Service Agreement to be execute by their
duly authorized officers and their corporate seals to be hereunto affixed and duly attested, as of the day
and year first above written.
COMMONWEALTH FINANCING AUTHORITY
By: ______________ _
Executive Director
Attest:
Secretary
COMMONWEALTH OF PENNSYLVANIA, acting
through the Department of Community and Economic
Development
By:. __________ ~------~-------Secretary of Community and
Attest:
Economic Development
Chief Counsel, Department of Community
and Economic Development
The Secretary hereby agrees to comply with the provisions of Section 11 of this Service
Agreement.
PHILADELPHlA\4022009\4 232183.000
COMMONWEALTH OF PENNSYLVANIA, acting
through the Office of the Budget
By: __________________________ __
Secretary of the Budget
[Signature Page to Ser\jce Agreement]
EXHIBIT A
OBLIGATION PAYMENT SCHEDULE
Commonwealth Financing Authority, Pennsylvania
Revenue Bonds, Series 2009A&B
Payment Date
11/1/2009 5/1/2010
1111/2010 5/1/2011
1111/2011 5/112012
11/112012 5/1/2013
1111/2013 5/1/2014
11/l/2014 5/1/2015
1111/2015 511/2016
I 1111/2016 511/2017
11/1/2017 5/1/2018
1111/2018 5/1/2019
1111/2019 511/2020
1111/2020 5/1/2021
11/1/2021 5/1/2022
1111/2022 5/112023
11/1/2023 5/1/2024
11/1/2024 5/1/2025
1111/2025 511/2026
1111/2026 5/1/2027
11/l/2027 5/l/2028
11/1/2028 5/1/2029
11/112029 5/1/2030
11/l/2030 5/l/2031
PHILADELPHIA\4022009\4 232183.000
Payment Amount
$2,804,565.08 2,562,546. 78 2,562,546.78 5,357,546.78 2,520,971.15 5,395,971.15 2,465,828.65 5,450,828.65 2,401,143.70 5,516,143.70 2,328, 190.40 5,588,190.40 2,24 7, 766.20 5,672,766.20 2,155,428.20 5,760,428.20 2,054,632.40 5,864,632.40 1,944,294.80 5,974,294.80 1,825,571.00 6,090,571.00 1,697,791.60 6,217,791.60 I ,560,112.40 6,360,112.40 r ,406,704.40 6,511,704.40 I ,243,548.60 6,673,548.60 1,105,897.50 6,81 0,897.50
979,928.75 6,939,928.75
844,453.75 7,074,453.75
699,072.50 7,219,072.50
539,125.00 7,379,125.00
368,125.00 7,553,125.00
188,500.00 7, 728,500.00
FIRST AMENDMENT TO SERVICE AGREEMENT
This FIRST AMENDMENT TO SERVICE AGREEMENT, dated as of April 15, 2010 (this "Amendment"), is made by and between the COMMONWEALTH FINANCING AUTHORITY, an instrumentality of the Commonwealth of Pennsylvania and a body corporate and politic organized and existing under the laws of the Commonwealth of Pennsylvania (the "Authority"), and the COMMONWEALTH OF PENNSYLVANIA (the "Commonwealth") acting by and through the Department of Community and Economic Development (the "Department");
WITNESSETH:
WHEREAS, the Authority and the Commonwealth, acting by and through the Department, have heretofore entered into a Service Agreement, dated as of May l, 2009 (the "Existing Service Agreement"). Capitalized terms used in this Amendment and not expressly defined herein shall have the respective meanings given to those terms in, or in accordance with the provisions of, the Existing Service Agreement); and
WHEREAS, the Authority has determined to issue $62,000,000 principal amount of its Fixed Rate (Federally Taxable) Revenue Bonds, Series A of 2010 ("Series 2010A Bonds") and $80,000,000 principal amount of its Fixed Rate (Tax-Exempt) Revenue Bonds, Series B of 2010 (the "Series 201 OB Bonds" and together with the Series 201 OA Bonds, the "Series 2010 Bonds") and pursuant to the Trust Indenture, dated as of May 1, 2009, as amended and supplemented by the First Supplemental Trust Indenture, dated as of April 15, 2010 (as so amended and supplemenr.ed, the "Indenture"), between the Authority and TD Bank, National Association, as T rustcc; and ·
WHEREAS, in accordance with Section 6 of the Existing Service Agreement, the Authority and the Commonwealth wish to provide for the application of the provisions of the Existing Service Agreement to the Series 201 0 Bonds and to amend the Obligation Payment Schedule to include the Series 201 0 Bonds; and
WHEREAS, the Existing Service Agreement, as amended by this Amendment, is herein referred to as the "Service Agreement"; and
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto covenant and agree as follows:
ARTICLE I ISSUANCE OF.SERIES 2010 BONDS
Section 1.01 Approval of Series 2010 Bonds. The Department hereby approves the issuance of the Series 2010 Bonds on the terms set forth in the Indenture. As used in the Service Agreement, the term "Bonds" shall be deemed to include, without limitation, the Series 201 0 Bonds.
Section 1.02 Amended Obligation Payment Schedule. The Obligation Payment Schedule is hereby amended and restated to read in its entirety as set forth in Exhibit A to this Amendment, which Exhibit A is hereby incorporated herein and made a part hereof.
Section 1.03 Sufficiency of Legislative Appropriation to the Department. The Department hereby acknowledges and confirms that the Department has requested that the legislature appropriate sufficient moneys to allow the· Department to make all Service Fcc
#12191527 vS
payments under the Service Agreement that are shown on the amended Obligation Payment Schedule set forth in Exhibit A hereto to be due and payable initially during the fiscal year ending June 30, 2011.
ARTICLE II CONFIRMATION OF EXISTING SERVICE AGREEMENT
Section 2.01 Confirmation of Existing Service Agreement Except as amended and supplemented by this Amendment, the Existing Service Agreement is in all respects ratified, approved and confirmed and continues in full force and effect, and the Existing Service Agreement and this Amendment, shall be read, taken and construed as one and the same instrument so that all of the rights, remedies, terms, conditions, covenants and agreements of the Existing Service Agreement shall apply and remain in full force and effect with respect to this Amendment, the Bonds, and all additional Service Fee payments provided for herein.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-2-#12191527 vS
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the day and year first above written.
#12191527 \'4
COMMONWEALTH FINANCING AUTHORITY
BySoe_~«;~ Name: Title:
Attest:
Title:
COMMONWEALTH OF PENNSYLVANIA, acting by and through the Department of Community and Economic Development
By:,....,-______________ _ Name: Title:
Name: Title:
Signature Page to Amendment to Service Agreement
- 3-
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers as of the day and year first above written.
COMMONWEALTH FINANCING AUTHORITY
By: ~N~am--e_: ______________________________ __
Title:
Attest:
By:~-------------Name: Title:
COMMONWEALTH OF PENNSYLVANIA, acting by and through the Department of Community and Economic Development
ft;t2L By· · . . Name: 1
Sif!nature Page to Amendment to Service Agreement
- 3-
EXHIBIT A
AMENDED AND RESTATED OBLIGATION PAYMENT SCHEDULE
Covering the following series of bonds of the Commonwealth Financing Authority:
Fixed Rate (Federally Taxable) Revenue Bonds, Series A of2009 Fixed Rate (Tax-Exempt) Revenue Bonds, Series B of 2009 Fixed Rate (Federally Taxable) Revenue Bonds, Series A of2010 Fixed Rate (Tax-Exempt) Revenue Bonds, Series B of2010
(TABLE ON NEXT PAGE)
Exhibit A Page 1 of2
Pavment Date
11/112010
5/1/2011 --
1111/2011
511/2012
1111/2012
5/1/2013
11/1/2013 r---
511/2014
1111/2014
5/J/2015
1111/2015
511/2016
11/1/2016
5/J/2017 r--
11/1/2017
5/1/2018
11/1/2018
5/1/2019
11/1/2019
5/1/2020 ,.-----·
11/1/2020 "-----
5/112021
11/1/2021
5/1/2022 ~·-
11/1/2022 -
5/1/2023
11/1/2023 --
5/1/2024
1111/2024
5/112025
1111/2025
511/2026
11/112026 ---
5/1/2027
11/1/2027
5/1/2028
1111/2028
5/1/2029
11/1/2029
5/I/2030
11/1/2030
511/2031 --
11/1/2031 ~
511/2032
Payment Amount
6,515,008.42
12,086,379.03
5,738,551.65
12,858,551.65
5,646,477.65
12,951,477.65
5,529,952. 70
13,069,952.70
5,387,305.65
13,207,305.65
5,224,345.45
13,379,345.45
5,033,386.95
13,563,386.95
4,822,763.65
13,777,763.65
4,587,402.55
14,012,402.55
4,330,836.50
14,265,836.50
4,055,353.60
14,540,353.60 -
3,759,303.65
14,839,303.65
3,436,021.65 --- - -----------
15,161,021.65
3,100,111.10
15,500,111.10
2,788,210.00
15,808,210.00
2,479,366.25
16,119,366.25
2,175,891.25 ----- -·
16,425,891.25 -- --·---: ------
Exhibit A Page 2 of2
1,855,072.50
16,745,072.50
I ,485,875.00
17,110,875.00
1,095,250.00
17,505,250.00
685,000.00
17,915,000.00
254,250.00
I 0,424,250.00
--
SECOND AMENDMENT TO SERVICE AGREEMENT (ALTERNATIVE ENERGY DEVELOPMENT PROGRAM)
This SECOND AMENDMENT TO SERVICE AGREEMENT, dated as of January 1, 2013 (this "Amendment"), is made by and between the COMMONWEALTH FINANCING AUTHORITY, an instrumentality of the Commonwealth of Pennsylvania and a body corporate and politic organized and existing under the laws of the Commonwealth of Pennsylvania (the "Authority"), and the COMMONWEALTH OF PENNSYLVANIA (the "Commonwealth") acting by and through the Department of Community and Economic Development (the "Department");
WITNESSETH:
WHEREAS, the Authority and the Commonwealth, acting by and through the Department, have heretofore entered into a Service Agreement, dated as of May 1, 2009, as amended by a First Amendment to Service Agreement, dated as of April 15, 2010 (as amended, the "Existing Service Agreement"). (Capitalized terms used in this Amendment and not expressly defined herein shall have the respective meanings given to those terms in, or in accordance with the provisions of, the Existing Service Agreement); and
WHEREAS, the Authority has determined to issue $75,000,000 principal amount of its Revenue Bonds (Federally Taxable), Series A-1 of 2013 ("Series 2013A-1 Bonds") and $48,000,000 principal amount of its Revenue Bonds (Tax-Exempt), Series A-2 of 2013 (the "Series 2013A-2 Bonds" and together with the Series 2013A-1 Bonds, the "Series 2013 Bonds") and pursuant to the Trust Indenture, dated as of May 1, 2009, as previously amended and supplemented by the First Supplemental Trust Indenture, dated as of April 15, 2010, and as further amended and supplemented by the Second Supplemental Trust Indenture, dated as of January 1, 2013 (as so amended and supplemented, the "Indenture"), between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor Trustee; and
WHEREAS, in accordance with Section 7 of the Existing Service Agreement, the Authority and the Commonwealth wish to provide for the application of the provisions of the Existing Service Agreement to the Series 2013 Bonds and to amend the Obligation Payment Schedule to include the Series 2013 Bonds; and
WHEREAS, the Existing Service Agreement, as amended by this Amendment, is herein referred to as the "Service Agreement"; and
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto covenant and agree as follows:
2
ARTICLE I ISSUANCE OF SERIES 2013 BONDS
Section 1.01 Approval of Series 2013 Bonds. The Department hereby approves the issuance of the Series 2013 Bonds on the terms set forth in the Indenture. As used in the Service Agreement, the term "Bonds" shall be deemed to include, without limitation, the Series 2013 Bonds.
Section 1.02 Amended Obligation Payment Schedule. The Obligation Payment Schedule is hereby amended and restated to read in its entirety as set forth in Exhibit A to this Amendment which Exhibit A is hereby incorporated herein and made a part hereof.
Section 1.03 Sufficiency of Legislative Appropriation to the Department. The Department hereby acknowledges and confirms that: (i) sufficient moneys have been appropriated by the Legislature (as defined in the Indenture) to make all Service Fee payments that are shown on the amended Obligation Payment Schedule set forth in Exhibit A hereto to be due and payable during the fiscal year ending June 30, 2013; and (ii) the Department has submitted a request to the Secretary of the Budget in a timely manner for appropriations of sufficient moneys to allow the Department to make all Service Fee payments that are shown on the amended Obligation Payment Schedule set forth in Exhibit A hereto to be due and payable during the fiscal year ending June 30, 2014.
Section 1.04 Amendment to Term of Service Agreement. Section 2 of the Service Agreement is hereby amended by deleting the date “June 1, 2031” in the second line thereof and inserting in its place the date “June 1, 2033”.
ARTICLE II CONFIRMATION OF EXISTING SERVICE AGREEMENT
Section 2.01 Confirmation of Existing_ Service Agreement. Except as amended and supplemented by this Amendment, the Existing Service Agreement is in all respects ratified, approved and confirmed and continues in full force and effect, and the Existing Service Agreement and this Amendment, shall be read, taken and construed as one and the same instrument so that all of the rights, remedies, terms, conditions, covenants and agreements of the Existing Service Agreement shall apply and remain in full force and effect with respect to this Amendment, the Bonds, and all additional Service Fee payments provided for herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers and the Authority has caused it seal to be hereunto affixed and duly attested, as of the day and year first above written.
COMMONWEALTH FINANCING AUTHORITY
By:_______________________________________ Executive Director
Attest:
[SEAL] __________________________________________ Secretary
COMMONWEALTH OF PENNSYLVANIA, acting by and through the Department of Community and Economic Development
By:_______________________________________ Secretary of Community and Economic Development
Witness:
__________________________________________ Chief Counsel, Department of Community and Economic Development
Signature Page to Service Agreement Amendment (Alternative Energy Development Program)
Exhibit A Page 1 of 2
EXHIBIT A
AMENDED AND RESTATED OBLIGATION PAYMENT SCHEDULE (ALTERNATIVE ENERGY DEVELOPMENT PROGRAM)
Covering the following series of bonds of the Commonwealth Financing Authority:
Fixed Rate (Federally Taxable) Revenue Bonds, Series A of 2009 Fixed Rate (Tax-Exempt) Revenue Bonds, Series B of 2009 Fixed Rate (Federally Taxable) Revenue Bonds, Series A of 2010 Fixed Rate (Tax-Exempt) Revenue Bonds, Series B of 2010 Revenue Bonds (Federally Taxable), Series A-1 of 2013 Revenue Bonds (Tax-Exempt), Series A-2 of 2013
(TABLE ON NEXT PAGE)
Exhibit A Page 2 of 2
Payment Date Payment Amount
05/01/2013 $ 12,951,477.65 11/01/2013 9,109,722.87 05/01/2014 18,652,026.18 11/01/2014 7,469,868.88 05/01/2015 20,284,868.88 11/01/2015 7,288,302.30 05/01/2016 20,473,302.30 11/01/2016 7,068,194.95 05/01/2017 20,688,194.95 11/01/2017 6,819,600.25 05/01/2018 20,939,600.25 11/01/2018 6,537,960.75 05/01/2019 21,222,960.75 11/01/2019 6,225,428.30 05/01/2020 21,530,428.30 11/01/2020 5,884,753.60 05/01/2021 21,869,753.60 11/01/2021 5,515,141.15 05/01/2022 22,245,141.15 11/01/2022 5,110,640.40 05/01/2023 22,645,640.40 11/01/2023 4,685,401.10 05/01/2024 23,075,401.10 11/01/2024 4,276,911.25 05/01/2025 23,481,911.25 11/01/2025 3,865,241.88 05/01/2026 23,895,241.88 11/01/2026 3,452,338.13 05/01/2027 24,077,338.13 11/01/2027 3,022,572.50 05/01/2028 24,777,572.50 11/01/2028 2,481,750.00 05/01/2029 25,316,750.00 11/01/2029 1,910,875.00 05/01/2030 25,890,875.00 11/01/2030 1,311,375.00 05/01/2031 26,491,375.00 11/01/2031 681,875.00 05/01/2032 19,196,875.00 11/01/2032 219,000.00 05/01/2033 8,979,000.00
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APPENDIX D-2
FORM OF H2O SERVICE AGREEMENT
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1170996 10 11/20/09
SERVICE AGREEMENT
BETWEEN
COMMONWEALTH FINANCING AUTHORITY
AND
THE COMMONWEALTH OF PENNSYLVANIA
Relating to the Financing and Implementation of the H20 Grant Program under the
H20PA Act
Dated as of November 1, 2009
TABLE OF CONTENTS
Page No.
1. Definitions ........................................................................................................................................ 2 2. Term ................................................................... .............................................................................. 2 3. Authority Undertaking; Payment of Service Fee by Department. ................................... .. .............. 2
4. Assignment of Service Fee to Trustee ............................................................................................. 5
5. Termination of Obligation to Pay Service Fee ................................................................................. 6
6. The Department to Provide for Payment of the Service Fee from its Annual Budget. .................... 6
7. Issuance of Additional Bonds .......................................................................................................... 6
8. Federal Tax Covenants ..................................................................................................................... 6
9. Representations of the Authority ....... ...... ........................................................................................ 7
10. Representations of the Department. .............................................. ... ................................................ 7
1I. Consent of the Secretary of the Budget ............................................................................................ 7
I2. The Department's Certificate ........................................................................................................... 7
I3. Defaults and Remedies ..................................................................................................................... 8
14. Recordation ...................................................................................................................................... 9
IS. Governing Law ................................................................................................................................ 9
16. Notices ............................................. ................................................................................................ 9
17. Cooperation in Filing Reports ........................................................................................................ 10
18. Amendments and Supplements ...................................................................................................... I 0
I9. Provisions Separate ........................................................................................................................ I 0
20. Execution in Counterparts .............................................................................................................. 1 0
21. Exhibits .......................................................................................................................................... I 0
22. Descriptive Headings ..................................................................................................................... 1I
23. Binding Effect, Permitted Assigns ................................................................................................. 11
24. Miscellaneous ................................................................................................................................. 11
Exhibit "A"- Obligation Payment Schedule
1170996.10 11/20/09
SERVICE AGREEMENT
This SERVICE AGREEMENT dated as of November I, 2009 (the "Service Agreement"), between COMMONWEALTH FINANCING AUTHORITY (the "Authority"), an instrumentality of the Commonwealth of Pennsylvania and a body corporate and politic organized and existing under Pennsylvania law, and the COMMONWEALTH OF PENNSYLVANIA (the "Commonwealth") acting through the Department of Community and Economic Development (the "Department");
WITNESSETH
WHEREAS, the Authority was created pursuant to 64 P.C.S. Section 1501 et seq. (as amended from time-to-time, the "Act") for the purpose of, among other things, providing financial assistance for certain programs; and
WHEREAS, pursuant to 32 P.S. Section 694 et seq. (the "H20 PA Act"), the Authority may incur indebtedness in an amount up to $800,000,000 in order to provide funds for grants to be used to fund water and sewer projects, storm water projects, flood control projects and high hazard unsafe dam projects (the "H20 Grant Program"); and
WHEREAS, in order to fund the H20 Grant Program established in the H20 P A Act, the Authority has authorized the issuance of $400,000,000 Revenue Bonds, Series D of 2009 (Federally Taxable-Build America Bonds) (the "2009 Bonds"); and
WHEREAS, in order to provide for the authentication and delivery of the 2009 Bonds, to establish and declare the terms and conditions upon which the 2009 Bonds are to be issued and secured and to secure Obligations (as defined in the Indenture described below), the Authority has authorized the execution and delivery of the Trust Indenture (the "Indenture") dated as of November I, 2009 between the Authority and TD Bank, National Association (the "Trustee"); and
WHEREAS, Obligations will be paid by the Department pursuant to this Service Agreement under which the Department agrees to seek appropriations from the Legislature (as defined in the Indenture) in amounts sufficient to pay all Obligations on the 2009 Bonds and to cause such appropriations to be paid directly to the Authority or its assignee; and
WHEREAS, the interest component of Bond Payment Obligations (as defined in the Indenture) on the 2009 Bonds will be paid in part from any Subsidy Payments (as defined in the Indenture) in the Interest Subsidy Payment Subaccount (as defined in the Indenture) received in connection with the 2009 Bonds; and
WHEREAS, pursuant to Section 1511 of the Act, the Authority is an independent authority and an instrumentality of the Commonwealth and a body corporate and politic; and
WHEREAS, pursuant to Section 1511 (I) of the Act, the Authority may enter into agreements with the Department setting forth the rights and obligations they have to each other in carrying out their respective responsibilities under, and to further the intent of, the Act; and
WHEREAS, pursuant to Section 1513(a)(8) of the Act, the Authority may enter into contracts, which are necessary or appropriate for carrying on the business of the Authority; and
WHEREAS, pursuant to Section 1521 (d) of the Act, the Department may not be made responsible for the payment of obligations of the Authority except for funds appropriated by the Commonwealth to the Authority for repayment of Obligations; and
11 70996.10 11120/09
WHEREAS, pursuant to the Act, the Authority is permitted to incur and pay administrative expenses of the Authority in order to enable the Authority to operate and administer its programs and perform its functions (including, but not limited to, the payment of any amounts into the Rebate Fund pursuant to Section 4.07 of the Indenture) as contemplated by the Act (the "Administrative Expenses").
NOW, THEREFORE, in consideration of the mutual agreements hereinafter contained, the parties hereto, intending to be legally bound hereby, agree as follows:
1. Definitions.
The terms defined in the foregoing recitals and clauses shall have the meanings specified therein. All capitalized terms that are used herein but that are not defined herein, and that are defined in the Indenture, shall have the same meaning herein as in the Indenture.
2. Term.
The "Term" of this Service Agreement shall commence on November 12, 2009, and shall end on the later of: (i) close of business on June 1, 2039 or (ii) the date on which there are no longer any Obligations Outstanding; provided, however, that the term of this Service Agreement shall be automatically extended without the necessity for any further act or deed, for such time as may be necessary to accomplish any of the following purposes, plus thirty (30) days:
(a) To enable the Authority to comply with any covenant, condition, term or provision of any agreement to which it is a party, or
(b) To enable the Department or the Authority to comply with any covenant, condition, term or provision of the Indenture (including, but not limited to, the obligation to make payments on any Obligation), or any other agreement or contract entered into by such party with the consent of the other party.
Either party hereto shall, at the request of the other party hereto (or at the request of the Trustee), enter into such written instrument or instruments as are required in order to memorialize and carry out the effect and intent of the foregoing subsections (a) and (b), notwithstanding that the foregoing provisions are intended to be fully effective without doing so.
3. Authority Undertaking; Payment of Service Fee by Department.
(a) The Authority agrees with the Department that it shall administer the H20 Grant Program as required by the H20 P A Act.
(b) The Department covenants that it will seek appropriations from the Legislature in amounts sufficient to pay the Service Fee, as hereinafter defined and to cause such appropriations to be paid directly to the Authority or its assignee. The Department further covenants that it will submit the request for such appropriations to the Secretary of the Budget (the "Secretary") in a timely manner. The Department further covenants that it will use its best efforts to have the Governor of the Commonwealth request the Legislature to include in the Department's annual budget an amount for payment of the Service Fee when due pursuant to subsection (c) below, equal to the aggregate amount specified in the Service Fee Estimate for the fiscal year of the Department covered by such budget request.
(c) The Department shall pay to the Authority (for deposit in the Revenue Fund as set forth in Section 4 hereof), as a service fee (the "Service Fee") hereunder, subject to the annual
1170996. 10 11120/09 2
appropriation by the Legislature of sufficient funds to pay such Service Fee, an aggregate amount equal to the sum ofthe following amounts (each a "Service Fee Component"):
(i) no later than May 1 and November 1 of each year, the amount of the Bond Payment Obligations necessary, after taking into account amounts on deposit in any Interest Subsidy Payment Subaccount, if any, on December 16 of the preceding calendar year (in the case of any BABs), to enable the Trustee to pay all regularly scheduled interest on Bonds coming due on the next Interest Payment Date (and any cumulative amounts which remain unpaid) as set forth on Exhibit "A" attached hereto (Exhibit "A", as it may be amended from time-to-time pursuant to Section 7 hereof, being hereinafter called the "Obligation Payment Schedule");
(ii) no later than May 1 of each year, the amount of the Bond Payment Obligations (and any cumulative amounts which remain unpaid) necessary to enable the Trustee to make the regularly scheduled principal payment on the Bonds (including payment obligations on any mandatory bond redemptions) scheduled to be made during such fiscal year of the Department as set forth in the Obligation Payment Schedule;
(iii) as required to make timely payment thereof, the amount necessary to make up any deficiency in the Debt Service Reserve Fund, if any, that is required to be funded by the Department pursuant to Section 4.05 of the Indenture;
(iv) as required to make timely payment thereof, the amount necessary to be provided by the Authority in order to enable the Trustee to make the full amount of any payment when due (and any cumulative amounts which remain unpaid) on other Obligations (including Financing Facility Payment Obligations);
(v) as required to make timely payment thereof any amounts required to be deposited in the Rebate Fund under the Indenture;
(vi) as required to make timely payment thereof the amount necessary for Administrative Expenses; and
(vii) as required to make timely payment thereof the amount necessary for Administrative Fees and Expenses of the Trustee under the Indenture.
(d) On or before January 1 of each year, the Authority shall cause the Trustee under the Indenture to certify to the Authority and the Department the amount on deposit in the Interest Subsidy Payment Subaccount, if any, on December 16 of the preceding calendar year. In order to enable the Legislature to appropriate sufficient funds to enable the Department to make the Service Fee payments when they come due hereunder, the Department agrees that it shall notify the Secretary, in writing, no later than each January 15 (or, if the final day of the Department's fiscal year changes to a day other than June 30, then no later than one hundred fifty (150) days prior to the beginning of each of the Department's subsequent fiscal years), during the term of this Service Agreement (with the first such notification being due not later than January 15, 2010 for the Department's fiscal year beginning July 1, 2010) of the estimated amounts of the Service Fee and the Service Fee Components for the following fiscal year (the "Service Fee Estimate"); provided however, that if the Department shall fail to deliver to the Secretary such Service Fee Estimate on or prior to the last date specified above for such delivery, then it shall conclusively be deemed that the Service Fee payments to be made in the next following fiscal year of the Department shall be the same as the amount of the Service Fee appropriated for the current fiscal year. The Department acknowledges that sufficient monies have been appropriated by the Legislature to make all Service Fee payments under this Service Agreement that are shown on the Obligation Payment
1170996.10 I I/20/09 3
Schedule to be due and payable prior to the commencement of the Department's fiscal year beginning July 1, 2010.
(e) The Department also agrees to notifY the Secretary, in writing, at least one hundred twenty (120) days prior to the due date of each Service Fee payment hereunder, as to the amount of funds that will be required from the Commonwealth (in addition to any other monies that will be available for such purpose in the Revenue Fund) in order to enable the Trustee to make all payments coming due prior to the next scheduled Service Fee payment date hereunder; provided, however, that if the Department shall fail to deliver such notice to the Secretary on or prior to the last date specified above for such delivery, then it shall be conclusively deemed that the Service Fee payment required from the Commonwealth at that time is the same as the estimate thereof in the pertinent Service Fee Estimate.
(f) In the event that the Service Fee paid by the Department hereunder for any of its fiscal years shall exceed the actual Service Fee Components paid by the Trustee and the Authority during such fiscal year, then the Authority shall cause the Trustee to accumulate and hold such excess in the Revenue Fund in accordance with all applicable arbitrage requirements, and such excess and interest earned thereon (except any such interest which is required to be transferred to the Rebate Fund) shall be applied as a credit against the next year's Service Fee.
(g) The Department's obligation to pay the Service Fee hereunder shall survive the termination of this Service Agreement and shall otherwise continue in full force and effect until all of the Bonds and other Obligations have been defeased and/or satisfied and all of the payment obligations of the Authority to the Holders of the Bonds and holders of any other Obligations have been met. Subject to the appropriation of funds for Service Fee payments hereunder by the Legislature as set forth in subsection (c) above, the obligation of the Department to pay the Service Fee shall be absolute and unconditional, and the Service Fee shall be paid without notice or demand (unless notice or demand is expressly provided for in this Service Agreement), counterclaim, set-off, defense, abatement, suspension or deferment, and without deduction, diminution or reduction of any kind or amount or for any reason. An acceleration of Obligations under the Indenture shall not cause the acceleration of payments of the Service Fee under this Service Agreement Without in any way limiting the foregoing, the obligations and liabilities of the Department hereunder to pay the Service Fee shall in no way be released, reduced, discharged or otherwise affected by reason of:
(i) Any payment made on behalf of the Department by reason of the Department's failure to meet one or more of its obligations hereunder, including (but not limited to) any payment by the Trustee from the Debt Service Reserve Fund because the Department has not made one or more payments of the Service Fee hereunder when due;
(ii) Any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to the Authority, or any action taken with respect to this Service Agreement by any trustee or receiver of the Authority, or by any court, in any such proceeding;
(iii) Any claim (whether by way of set-off, recoupment, counterclaim or otherwise) which the Department, the Commonwealth, the Secretary or anyone else has or might have against the Authority under this Service Agreement, the Indenture or otherwise;
(iv) Any failure on the part of the Authority to perform or comply with any of the terms of this Service Agreement or any other agreement with the Department, or of the Indenture or any agreement to which the Authority is a party;
1170996.10 11/20/09 4
(v) Any failure of the Authority or the Trustee to perform or observe any agreement or covenant, whether express or implied, or any duty, liability or obligation arising out of or connected with this Service Agreement, the Indenture or the Bonds;
(vi) Any failure of consideration, failure of title or commercial frustration of purpose;
(vii) Any change in the tax or other laws of the United States of America or of any state or other governmental authority;
(viii) Any determination that interest on any Tax-Exempt Bond is includable in the gross income of the Holder of such Tax-Exempt Bond for purposes of federal income taxation; and
(ix) Any other occurrence whatsoever, whether similar or dissimilar to the foregoing and whether or not either or both of the Department and the Authority shall have notice or knowledge of any ofthe foregoing.
The Department shall not limit or alter the rights vested by the Act or the H20 PA Act in the Authority (if such limitation or alteration would adversely affect the rights of the Trustee or the Bondholders, or both of them) until all Bonds and other Obligations at any time issued pursuant to the Indenture, together with interest thereon, are fully paid and discharged. The Department expressly waives all rights now or hereafter conferred by statute or otherwise if and to the extent that such rights allow the Department to quit, terminate or surrender this Service Agreement or any part thereof, or entitle the Department to any abatement, suspension, deferment, diminution or reduction of the service fee payable by the Department hereunder.
(h) Time shall be of the essence of this Service Agreement with respect to the Department's obligations under this Section and with respect to Section 17 hereof.
4. Assignment of Service Fee to Trustee.
Contemporaneously with execution hereof, the Authority is executing and delivering the Indenture and is thereby selling, assigning, transferring, setting over and pledging unto the Trustee (for the benefit and security of the Holders of the Bonds and other Obligations) all of the Authority's right, title and interest in and to the Service Fee payable to the Authority hereunder (other than the Service Fee Component constituting Administrative Expenses) in order to secure the payment of the Bonds and certain other Obligations to be issued or entered into pursuant to the Indenture, and the Trustee shall be deemed to be a third party beneficiary of this Service Agreement. The Department hereby consents to the provisions of the immediately preceding sentence, including the assignment of the Service Fee payable (other than the Service Fee Component constituting Administrative Expenses) by it hereunder to the Trustee, and agrees to make all payments of the Service Fee hereunder (other than the Service Fee Component constituting Administrative Expenses) directly to the Trustee (on behalf of the Authority) unless and until the Department receives written notification that such assignment has been terminated. Such Service Fee payments shall be made to the Trustee at the following address: TD Bank, National Association, 114 North Second Street, 5111 Floor, Harrisburg, PA 171 0 I, Attn: Corporate Trust Department, unless and until such address for payment shall be changed by written notice from the Trustee, or by wire transfer to an account designated by the Trustee. The Authority, for itself, its successors and assigns, agrees for the benefit of the Department (and the Indenture shall so require) that the Trustee will deposit the Service Fee (other than the Service Fee Component constituting Administrative Expenses) and other monies (if any) received by it from the Department hereunder in the Revenue Fund, or to be used in the manner specified in the Indenture for the payment of the Bond Payment Obligations on the then Outstanding Bonds and other Obligations and for any other purposes
1170996. 10 11120/09 5
permitted by the Indenture and this Service Agreement; provided that this sentence shall not preclude the deposit or retention of such monies in reserve funds (or other similar funds and accounts) established under the Indenture pending the payment of the Bonds and other Obligations. The Authority shall not withhold, or instruct the Department to withhold, from the Trustee, any amount of funds for Administrative Expenses greater than the amount of Administrative Expenses submitted as part of the Service Fee Estimate pursuant to Section 3 hereof for the fiscal year in question.
5. Termination of Obligation to Pay Service Fee.
If and when there are sufficient funds available to the Trustee, within the funds held by the Trustee for such purposes, to make the full payments of the Bond Payment Obligations and all other Obligations under the Indenture, the Department shall be relieved of making any further payments of the Service Fee hereunder; and from and after such time, the Authority may elect, on not less than ten ( l 0) days prior written notice to the Department and the Trustee, to terminate this Service Agreement.
6. The Department to Provide for Payment of the Service Fee from its Annual Budget.
The Department agrees that, until the Department is no longer obligated to pay the Service Fee under this Service Agreement that the Department will include the Service Fee in its annual budget request submitted to the Governor of the Commonwealth. The Department acknowledges that its covenant in the immediately preceding sentence is a material term of this Service Agreement the breach of which constitutes a default entitling the Authority to obtain damages for each such breach in an amount equal to the amount of the Service Fee payable in accordance with the applicable Service Fee Estimate together with interest thereon at the rate of interest payable on the Bonds and other Obligations between the date on which such Service Fee payment is due and the date on which such payment of the Service Fee and the interest thereon is actually made by the Department.
7. Issuance of Additional Bonds.
If and when Additional Bonds or other Obligations are issued pursuant to the Indenture and the Department shall have approved the issuance of such Additional Bonds or other Obligations (if such approval is then required by the Act or the Indenture), the Authority shall provide the Department with a revised Obligation Payment Schedule that will include the payment dates for both the Bonds and other Obligations that had theretofore been issued and that continue to be Outstanding and the Additional Bonds and other Obligations that are then being issued, and (upon delivery of such revised Obligation Payment Schedule to the Department) it shall thereafter be deemed to be the operative Obligation Payment Schedule in lieu of the prior one and Exhibit "A" hereto will be deemed to be automatically amended thereby without the necessity for any further act or deed.
8. Federal Tax Covenants.
(a) The Authority and the Department hereby covenant, for the benefit of the Holders from time-to-time of the Bonds which are intended to have interest excluded from gross income for purposes of federal income taxation (such intent to be indicated in the document offering such Bonds at the time of issuance), that the Authority and the Department shall at all times do and perform all acts and things necessary and desirable in order to assure that interest paid on such Bonds shall, for purposes of federal income taxation, be and remain excludable from the gross income of the recipients thereof and that they will refrain from doing or performing any act or thing that will cause such interest not to be so excludable. The Authority and the Department hereby covenant, for the benefit of the Holders from time-to-time of the Bonds including the 2009 Bonds which are designated BABs (such dedication to be indicated in the document offering such Bonds at the time of issuance) that the Authority and the Department shall at all times do and perform all acts and things necessary and desirable in order to assure that such Bonds continue to qualify as BABs under the Code.
1170996.10 11/20/09 6
(b) The Authority and the Department hereby covenant, for the benefit of the Holders from time-to-time of Bonds which are intended to have interest excluded from gross income for purposes of federal income taxation or Bonds, including the 2009 Bonds, which are designated BABs (such intent or dedication to be indicated in the document offering such Bonds at the time of issuance), that the Authority and the Department will not make any investment or other use of the "proceeds" (as that term is defined in Section 148 of the Code) of such Bonds, which would cause such Bonds to be "arbitrage bonds" (as that term is defined in Section 148 of the Code), and that they will comply with the requirements of such Code Section and regulations throughout the term of such Bonds.
(c) The Authority and the Department hereby covenant, for the benefit of the Holders from time-to-time of Bonds which are intended to have interest excluded from gross income for purposes of federal income taxation or Bonds, including the 2009 Bonds, which are designated BABs (such intent or dedication to be indicated in the document offering such Bonds at the time of issuance), that the Authority and the Department will comply with the requirement for rebate to the United States as described (along with other requirements) in the Tax Certificate.
(d) The provisions of this Section shall survive the termination of this Service Agreement.
9. Representations of the Authority.
The Authority represents, covenants and agrees that, as of the date of this Service Agreement: (a) it has full right, power and authority to execute this Service Agreement for the Term and on the conditions herein contained; and (b) it has full right, power and authority to perform all of its obligations and duties hereunder.
10. Representations of the Department.
The Department represents, covenants and agrees that, as of the date of this Service Agreement: (a) it has full right, power anq authority to execute this Service Agreement and to perform its obligations and duties hereunder; and (b) the Department's execution and delivery hereof and performance of its obligations hereunder have been duly authorized, are the legal, valid and binding obligations of the Department (enforceable in accordance with their terms) and do not conflict with or constitute a breach under any law, regulation, ruling, order or instrument by which the Department is bound or to which the Department or its properties are subject.
11. Consent of the Secretary of the Budget.
The Secretary covenants that, until the Department is no longer obligated to pay the Service Fee under this Service Agreement, the Secretary will use her best efforts to cause to be included in the annual budget submitted by the Governor of the Commonwealth to the Legislature, an amount, for payment of the Service Fee when due pursuant to Section 3( c) hereof, equal to the aggregate amount specified in the Service Fee Estimate for the fiscal year of the Department covered by such budget request. If such annual budget is not passed by June 30 of such fiscal year, the Secretary covenants to use her best efforts to include such Service Fee in a supplemental appropriation.
12. The Department's Certificate.
The Department agrees that, at any time and from time-to-time, within thirty (30) days after written request from the Authority or the Trustee to do so, the Department will execute, acknowledge and deliver to the entity making such request a written instr4ment in recordable form certifying that this Service Agreement is unmodified and in full force and effect (or if there have been modifications, that it is in full force and effect as modified and stating the modifications), and the dates to which the Service
1170996.10 11/20/09 7
Fee has been paid in advance, if any, and stating whether or not to the best knowledge of the signer of such certificate the Authority is in default in the performance of any covenant, agreement or condition contained in this Service Agreement and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant to this Section may be relied upon by any prospective transferee of the Authority's interest in this Service Agreement.
13. Defaults and Remedies.
(a) Except as is otherwise provided in subsection (d) below, (i) if the Department fails to pay the full amount of the Service Fee payment when due hereunder; or (ii) if the Department fails to comply with its obligations set forth in the first sentence of Section 6 hereof; or (iii) if the Department fails to perform any other covenant, condition or agreement hereunder within thirty (30) days after the Authority or the Trustee has given the Department written notice requiring the same to be performed; or (iv) if the Commonwealth shall be adjudicated as bankrupt, or sh3;ll make an assignment for the benefit of creditors or shall file a bill in equity or otherwise initiate proceedings for the appointment of a receiver of the Commonwealth's assets, or shall file any proceeding in bankruptcy or for reorganization or an arrangement under any federal or state law; or (v) if any proceeding in bankruptcy or for the appointment of a receiver shall be instituted by any creditor of the Commonwealth under any state or federal law, and such proceeding has not been terminated within sixty (60) days after its institution (the occurrence of any such event constituting an event of default and a breach under this Service Agreement), then and in addition to any other rights or remedies the Authority may have under this Service Agreement and at law and in equity, the Authority shall have the following rights:
(I) To recover from the Department all monies that are not paid when due, together with interest on the unpaid balance, at the rate of interest payable on the Bonds and other Obligations, between the date when each such sum is due and the date on which the Department actually pays such sum and interest thereon; and
(II) this Service Agreement.
To obtain specific performance of the Department's obligations under
(b) No right or remedy herein conferred upon or reserved to the Authority is intended to be exclusive of any other right or remedy herein or by law or in equity provided, but each shall be cumulative and in addition to every other right or remedy given herein or now or hereafter existing at law, in equity or by statute.
(c) No waiver by the Authority of any breach by the Department of any of the Department's obligations, agreements or covenants herein shall be a waiver of any subsequent breach or of any obligation, agreement or covenant, nor shall any forbearance by the Authority to seek a remedy for any breach by the Department be a waiver by the Authority of any rights and remedies with respect to such or any subsequent breach.
(d) Notwithstanding any provision of subsection (a) above to the contrary, it shall be a defense to the failure of the Department to pay the Service Fee when due hereunder if and to the extent that such failure occurs because the Legislature has not appropriated sufficient money in the Department's annual budget for this purpose to enable the Department to pay such Service Fee, even though the annual budget request of the Department submitted to the Legislature for this purpose did include sufficient funds to make such Service Fee payments in full.
1170996.10 11/20/09 8
14. Recordation.
At the election of the Authority, either a copy of this Service Agreement or a memorandum hereof (in a form acceptable to the Department) shall be recorded in the appropriate public office(s) specified by the Authority.
15. Governing Law.
This Service Agreement shall be construed according to and governed by the laws of the Commonwealth of Pennsylvania.
16. Notices.
All notices required or authorized to be given by the Authority or the Department pursuant to this Service Agreement shall be in writing and shall be sent by registered or certified mail, postage prepaid, or by a nationally recognized commercial overnight delivery service guaranteeing next-day delivery, to the following addresses:
1170996 I 0 11/20/09
(a) To the Authority, to:
Commonwealth Financing Authority Department of Community and Economic Development Commonwealth Ke~stone Building 400 North Street, 41 Floor Harrisburg, PA 17120 Attention: Scott Dunkelberger, Executive Director
with a copy to its Chief Counsel, at the same address
(b) To the Department, to:
(c)
Department of Community and Economic Development Commonwealth Ke~stone Building 400 North Street, 41 Floor Harrisburg, P A 17120 Attention: Scott Dunkelberger, Executive Director
with a copy to its Chief Counsel at:
Commonwealth Ke~stone Building 400 North Street, 41
' Floor Harrisburg, PA 17120 Attention: Steve Fishman, Esquire, Chief Counsel
To Standard & Poor's Corporation, to:
Standard & Poor's Corporation 55 Water Street, 381
h Floor New York, NY 10041 Attention: Public Finance
9
(d) To Moody's Investors Service, to:
Moody's Investors Service 7 World Trade Center 250 Greenwich Street New York, NY 10007 Attention: Bond Insurance Department
(e) To Fitch Ratings, to:
Fitch Ratings One State Street Plaza New York, NY 10004 Attn: Public Finance
or to such other addresses as may, from time-to-time, be furnished to the parties, effective upon the receipt of notice thereof given as set forth above.
17. Cooperation in Filing Reports.
The Department agrees that it will cooperate with the Authority in the preparation and filing of any information, report or other document with respect to the Bonds or any series of Bonds which may at any time be required, in the judgment of the Authority or the Trustee to be filed with the Internal Revenue Service pursuant to federal income tax laws.
18. Amendments and Supplements.
Except as is otherwise provided in Section 7 hereof, this Service Agreement may be amended or supplemented only by an instrument in writing signed by both of the parties hereto and, if so required by the Indenture (including, but not limited to, Section 6.07 thereof), approved or consented to by any or all of the Trustee, the Bondholders and any Financing Facility Provider. The parties hereto hereby agree to provide the Rating Agencies with a copy of any such amendment or supplement to which the Financing Facility Provider shall have granted its consent.
19. Provisions Separate.
In the event that any provision hereof (other than Sections 3 and 1 7 hereof) shall be held to be invalid, such invalidity shall not affect any other provision hereof, and the remaining provisions hereof shall be construed and enforced as if such invalid provision had not been contained herein.
20. Execution in Counterparts.
This Service Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Service Agreement shall become binding when any one or more counterparts hereof individually or taken together, shall bear the signatures of the Authority and the Department.
21. Exhibits.
All Exhibits to this Service Agreement are incorporated within this Service Agreement and constitute a part thereof.
1170996.10 11/20/09 10
22. Descriptive Headings.
Descriptive headings ofthe several Sections ofthis Service Agreement and any Table of Contents are intended for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.
23. Binding Effect, Permitted Assigns.
This Service Agreement shall be binding upon and shall inure to the sole benefit of the parties hereto, their respective successors and permitted assigns, and the Trustee (for the benefit of the Holders of the Bonds). No party may assign any of its rights or delegate any of its obligations hereunder if such action would be in violation of the Indenture, without the consent of the other party and the Trustee, and any such purported assignment or delegation shall be void.
24. MiscelJaneous.
Each and every covenant and agreement contained herein is, and shall be construed to be, a separate and independent covenant and agreement. All rights and remedies given or granted to either party in this Service Agreement are cumulative, nonexclusive and in addition to any and all rights and remedies that such party may have or be given at law, in equity or otherwise. No failure by either party to insist upon strict performance of this Service Agreement or to exercise any remedy upon the occurrence of an event of default (as set forth in Section 13 of this Service Agreement) shall constitute a waiver of such default, or a waiver or modification of any provision of this Service Agreement, and, likewise, no pr.ior course of dealing between the parties hereto shall constitute a waiver of such default or waiver or modification of any provision of this Service Agreement. Upon the occurrence of a default, the Authority or the Department, as the case may be, may exercise any one or more of the remedies available to it separately or concurrently and as often as required to enforce the other party's obligations. In addition to the other remedies provided in this Service Agreement, the Authority and the Department shall each be entitled to the restraint, by injunction, of the violation (or the attempted or threatened violation) by the other party of any of the covenants, conditions or provisions of this Service Agreement, and to a decree compelling specific performance of any such covenants, conditions or provisions. This Service Agreement constitutes the entire agreement of the parties with respect to the administration of the H20 Grant Program and the Service Fee and may not be changed, modified or terminated except in accordance herewith.
1170996 10 11/20/09 11
IN WITNESS WHEREOF, the parties have caused this Service Agreement to be executed by their duly authorized officers and their corporate seals to be hereunto affixed and duly attested, as of the day and year first above wri·tten.
--
COMMONWEALTH FINANCING AUTHORITY
Bys~~ Executive Director
COMMONWEALTH OF PENNSYLVANIA, acting-· . through the Department of Community and Economic Development
By:----'--~~r2~~~~ -Secretary of Community and
I
Economic Development
Chief Counsel, Department o and Economic Development
The Secretary hereby agrees to comply with the provisions of Section 11 of this Service Agreement.
COMMONWEALTH OF PENNSYLVANIA, acting through the Office of the Budget
By: _______________ _
Secretary of the Budget
Attest:
Chief Counsel, Office of the Budget
IN WITNESS WHEREOF, the parties have caused this Service Agreement to be executed by
their duly authorized officers and their corporate seals to be hereunto affixed and duly attested, as of the
day and year first above written.
COMMONWEALTH FINANCING AUTHORITY
By: __________________________________ _
Executive Director
Attest:
Secretary
CO:MMONWEALTH OF PENNSYLVANIA, acting through the Department of Community and Economic Development
By: _______________ _
Attest:
Secretary of Community and Economic Development
Chief Counsel, Department of Community and Economic Development
The Secretary hereby agrees to comply with the provisions of Section 11 of this Service
Agreement.
EXHffiiT"A"
OBLIGATION PAYMENT SCHEDULE
Commonwealth Financing Authority, Pennsylvania Revenue Bonds, Series D of 2009
Paxment Date Paxment Amount
05/01/2010 12,875,024.69 11/01/2010 11,645,750.98 05/01/2011 11,645,750.98 11/01/2011 11,645,750.98 05/01/2012 11,645,750.98 11/01/2012 11,645,750.98 05/0112013 20,865,750.98 11/0112013 11,489,794.68 05/0112014 20,909,794.68 1110112014 11,313,970.38 05/01/2015 20,963,970.38 11/01/2015 11,112,285.38 05/01/2016 21,022,285.38 11/01/2016 10,887,823.88 05/01/2017 21,087,823.88 11/01/2017 10,640,320.88 05/0112018 21 ,165,320.88 11/01/2018 10,374,406.75 05/0112019 21,239,406.75 11/01/2019 10,095,556.53 05/0112020 21,325,556.53 11/01/2020 9,778,140.58 05/01/2021 21,418,140.58 11101/2021 9,449,135.98 05/01/2022 21,514,135.98 1110112022 9,108,118.75 05/0112023 21,618,118.75 11/01/2023 8,754,523.60 05/0112024 21 ,724,523.60 1110112024 8,387,926.55 05/0112025 21,832,926.55 11/01/2025 7,969,921.50 05/01/2026 21,954,921.50 11/01/2026 7,535,127.85 05/01/2027 22,085,127.85 11/01/2027 7,082,768.35 05/01/2028 22,217,768.35
In accordance with Section 3(c)(i) of the Service Agreement, the amounts listed in the column titled "Payment Amount" will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount held under the Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the interest portion of Bond Payment Obligations on the 2009 Bonds.
1170996.10 11/20/09 A-1
Commonwealth Financing Authority, Pennsylvania Revenue Bonds, Series D of 2009
Payment Date Payment Amount·
11/01/2028 6,612,221.20 05/01/2029 22,3 57,221.20 11/01/2029 6,122, 709.15 05/01/2030 22,502,709.15 11/01/2030 5,613,454.95 05/01/2031 22,653,454.95 11/01/2031 5,083,681.35 05/01/2032 22,808,681.35 11/01/2032 4,532,611.10 05/01/2033 22,972,611.10 11101/2033 3,959,311.50 05/0112034 23,144,311.50 11/01/2034 3,362,849.85 05/0112035 23,322,849.85 11101/2035 2,742,293.45 05/01/2036 23,502,293.45 11/01/2036 2,096,865.05 05/01/2037 23,696,865.05 11101/2037 1,425,321.05 05/01/2038 23,895,321.05 11101/2038 726,728.75 05/0112039 24,101,728.75
In accordance with Section 3(c)(i) of the Service Agreement, the amounts listed in the column titled "Payment Amount" will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount held under the Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the interest portion of Bond Payment Obligations on the 2009 Bonds.
1170996.10 11/20/09 A-2
DM3\1448325.7
FIRST AMENDMENT
TO
SERVICE AGREEMENT
BETWEEN
COMMONWEALTH FINANCING AUTHORITY
AND
THE COMMONWEALTH OF PENNSYLVANIA (Originally dated as ofNovember 1, 2009)
Relating to the Financing and Implementation of the H20 Grant Program under the
H20PAAct
Dated as of September 1, 201 0
FIRST AMENDMENT TO SERVICE AGREEMENT
This FIRST AMENDMENT TO SERVICE AGREEMENT is dated as of September 1,
2010 (the "Service Agreement Amendment"), and is made between COMMONWEALTH
FINANCING AUTHORITY (the "Authority"), an instrumentality of the Commonwealth of
Pennsylvania and a body corporate and politic organized and existing under Pennsylvania law,
and the COMMONWEALTH OF PENNSYLVANIA (the "Commonwealth") acting through
the Department of Community and Economic Development (the "Department").
WITNESSETH
WHEREAS, the Authority was created pursuant to 64 Pa.C.S. Section 1501 et seq. (as
amended . from time-to-time, the "Act") for the purpose of, among other things, providing
financial assistance for certain programs; and
WHEREAS, pursuant to 32 P.S. Section 6.94 et seq., as amended by Act 50 (the "H20
PA Act"), the Authority may incur indebtedness in an amount up to $800,000,000 in order to
provide funds for grants to be used to fund water and sewer projects, storm water projects, flood control projects and high hazard unsafe dam projects (the "H20 Grant Program"); and
WHEREAS, in order to fund the H20 Grant Program established in the H20 P A Act,
the Authority previously issued $400,000,000 Revenue Bonds, Series D of 2009 (Federally
Taxable-Build America Bonds) (the "2009 Bonds"); and
WHEREAS, in order to provide additional funding for the H20 Grant Program
established in the H20 PA Act, the Authority has authorized the issuance of $53,080,000
Revenue Bonds, Series C-1 of 2010 (Tax-Exempt) (the "Series C-1 2010 Bonds") and
$96,920,000 Revenue Bonds, Series C-2 of 2010 (Federally Taxable- Bujld America Bonds)
(together with the Series C-1 2010 Bonds, the "2010 Bonds")
WHEREAS, in order to provide for the authentication and delivery of the 2009 Bonds, to
establish and declare the terms and conditions upon which the 2009 Bonds were issued and
secured and to secure Obligations (as defined in the Indenture described below), the Authority
authorized the execution and delivery of the Trust Indenture (the "Original Indenture"), dated
as of November 1, 2009 between the Authority and TD Bank, National Association (the
"Trustee"), which Original Indenture was supplemented in order to provide for the
authentication and delivery of the 2010 Bonds, to establish and declare the tenns and conditions
upon which the 2010 Bonds are to be issued and secured and to secure Obligations pursuant to the First Supplemental Indenture dated as of September 1, 2010 between the Authority and the
Trustee (together with the Original Indenture, the "Indenture"); and
2 DM3\I448325.7
WHEREAS, the Authority and the Commonwealth, acting through the Department
executed and delivered a Service Agreement, dated as of November 1, 2009 (the "Service
Agreement"), under which the Department agreed to seek appropriations from the Legislature
(as defined in the Original Indenture) in amounts sufficient to pay all Obligations on the 2009
Bonds and to cause such appropriations to be paid directly to the Authority or its assignee; and
WHEREAS, pursuant to Section 2.12 of the Originai Indenture, as a condition to the
issuance of the 2010 Bonds as "Additional Bonds," the Trustee must receive an amendment to
the Service Agreement which extends the Department's obligation to make payments thereunder
with respect to such Additional Bonds; and
WHEREAS, pursuant to Section 7 of the Service Agreement, upon the Department's
receipt of a revised Obligation Payment Schedule (as defined in the Service Agreement) that sets
forth "Payment Dates" and "Payment Amounts" with respect to both the 2009 Bonds and 2010
Bonds, the Service Agreement shall be automatically amended to extend the Department's
obligation to make payments thereunder with respect to the 2010 Bonds; and
NOW, THEREFORE, in consideration of the mutual agreements hereinafter contained,
the parties hereto, intending to be legally bound hereby, agree as follows:
1. Amendments to the Service Agreement. The Service Agreement is amended as
follows:
(a) Section 2.- Term. Section 2 of the Service Agreement is hereby amended
by deleting the date "June 1, 2039 in the second line thereof, and inserting in its place the date
"June 1, 2040"; and
(b) Exhibit "A". Exhibit "A" to the Service Agreement, entitled Obligation
Payment Schedule, that sets forth "Payment Dates" and "Payment Amounts" with respect to the
2009 Bonds, is hereby deleted in its entirety, and in lieu thereof a new Exhibit "A" entitled
Obligation Payment Schedule, that sets forth "Payment Dates" and "Payment Amounts" with
respect to both the 2009 Bonds and 2010 Bonds, is added to the Service Agreement, as set forth
in Exhibit "A" attached hereto.
2. Full Force and Effect. Unless deleted, added or otherwise amended by Section 1 of
this Service Agreement Amendment, all the remaining terms and conditions of the Service
Agreement shall remain in full force and effect according to its tenns.
3. Counterparts. This Service Agreement Amendment may be executed in two or more
counterparts, each of which will be deemed an original, but together will constitute one and the
same instrument.
[Remainder of Page Intentionally Blank]
3 DM3\1448325. 7
IN WITNESS WHEREOF, the parties have caused this Service Agreement Amendment
.to be executed by their duly authorized officers and their corporate seals to be hereunto affixed
and duly attested, as of the day and year first above written.
DM3\!448325
COMMONWEALTH FINANCING AUTHORITY
ByS'. -- .. "\ . n nO"""' A ... , _________ _
Exe~
Attest:
Secretary
COMMONWEALTH OF PENNSYLVANIA, acting through the Department of Community and Economic Development
By: ___________ '-------Secretary of Community and Economic Development
Attest:
Chief Counsel, Department of Community and Economic Development
2
IN WiTNESS WHEREOF, the parties have caused this Service Agreement Amendment to be executed by their duly authorized officers and their corporate seals to be hereunto affixed and duly attested, as of the day and year first above written.
DM3\1448325
COMMONWEALTH FINANCING AUTHORITY
By: _______________ _ Executive Director
Attest:
Secretary
COMMONWEALTH OF PENNSYLVANIA, acting through the Department of Community and Economic Development
By:.____::____y_~~.·~=--=-~---=-=~~--=-=--Secrctary of Community and Economic Development
Attest:
Chief Counsel, Department of Community and Economic Development
/
EXHIBIT "A"
OBLIGATION PAYMENT SCHEDULE
Commonwealth Financing Authority, Pennsylvania Revenue Bonds, Series D of 2009
PaYment Date PaYment Amount"
05/01/2010 12,875,024.69
11/01/2010 11,645,750.98
05/01/2011 11,645,750.98
11/01/2011 11,645,750.98
05/01/2012 11,645,750.98
11/01/2012 11,645,750.98
05/01/2013 20,865,750.98
11/01/2013 11,489,794.68
05/01/2014 20,909,794.68
11/01/2014 11,313,970.38
05/01/2015 20,963,970.3 8
11/01/2015 11,112,285.38
05/01/2016 21,022,285.38
11/01/2016 10,887,823.88
05/01/2017 21,087,823.88
11/01/2017 10,640,320.88
05/01/2018 21,165,320.88
11/01/2018 10,374,406.75
05/01/2019 21,329,406.75
11/01/2019 10,095,556.53
05/01/2020 21,325,556.53
11/01/2020 9,778,140.58
05/01/2021 21,418,140.58
11/01/2021 9,449,135.98
05/01/2022 21,514,135.98
11/01/2022 9,108,118.75
05/01/2023 21,618,118.75
11/01/2023 8,754,523.60
05/01/2024 21,724,523.60
11/01/2024 8,387,926.55
05/01/2025 21,832,926.55
• In accordance with section 3(c)(i) of the Service Agreement, the amounts listed in the column titled "Payment
Amount" will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount held under the
Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the
interest portion of Bond Payment Obligations on the 2009 Bonds.
A-1 DMJ\1448325. 7
Commonwealth Financing Authority, Pennsylvania Revenue Bonds, Series D of 2009
Payment Date Payment Amount
11/0112025 7,969,921.50
05/0112026 21,954,921.50
11/01/2026 7,535,127.85
05/01/2027 22,085,127.85
11/0112027 7,082,768.35
05/01/2028 22,217,768.35
11/01/2028 6,612,221.20
05/01/2029 22,357,221.20
11/01/2029 6,122,709.15
05/01/2030 22,502,709.15
11/01/2030 5,613,454.95
05/01/2031 22,653,454.95
11/01/2031 5,083,681.35
05/01/2032 22,808,681.3 5
11/01/2032 4,532,611.10
05/01/2033 22,972,611.10
11/01/2033 3,959,311.50
05/01/2034 23,144,311.50 .
11/01/2034 3,362,849.85
05/0112035 23,322,849.85
11/01/2035 2,742,293.45
05/01/2036 23,502,293.45
11/01/2036 2,096,865.05
05/01/2037 23,696,865.05
11/01/2037 1,425,321.05
05/01/2038 23,895,321.05
11/01/2038 726,728.75
05/01/2039 24,101 '728. 75
• In accordance with section 3(c)(i) of the Service Agreement, the amounts listed in the column titled "Payment
Amount" will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount held under the
Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the
interest portion of Bond Payment Obligations on the 2009 Bonds.
A-2
Commonwealth Financing Authority, Pennsylvania Revenue Bonds, Series C of2010
Payment Date Payment Amount"'
05/01/2011 7,268,390.01
11/01/2011 3,810,461.45
05/01/2012 6,695,461.45
11/01/2012 3,781,611.45
05/01/2013 6, 726,611.45
11/01/2013 3,737,436.45
05/0112014 6, 772,436.45
11/01/2014 3,691,911.45
05/01/2015 6,816,911.45
11/01/2015 3,645,036.45
05/0112016 6,865,036.45
11/01/2016 3,596,736.45
05/01/2017 6,911,736.45
11/01/2017 3,530,436.45
05/01/2018 6,975,436.45
11/01/2018 3,451,811.45
05/01/2019 7,056,811.45
11101/2019 3,377,211.45
05/01/2020 7,132,211.45
11/01/2020 3,283,336.45
05/01/2021 7,223,336.45
11/01/2021 3,184,836.45
05/01/2022 7,324,836.45
11/01/2022 3,081,336.45
05/01/2023 7,426,336.45
11/01/2023 2,972,711.45
05/01/2024 7,537,711.45
11/01/2024 2,858,586.45
05/01/2025 7,648,586.45
11/01/2025 2,777,755.20
05/01/2026 7,732,755.20
11/01/2026 2,639,337.28
05/01/2027 7,769,337.28
• In accordance with section 3(c)(i) of the Service Agreement, the amounts listed in the column titled "Payment
Amount" will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount held under the
Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the
interest portion of Bond Payment Obligations on the 2009 Bonds.
A-3
PaYment Date PaY!nent Amount
11/01/2027 2,496,030.73
05/01/2028 7,816,030.73
11/01/2028 2,347,416.53
05/01/2029 7,857,416.53
11/01/2029 2,193,494.68
05/01/2030 7,903,494.68
11/01/2030 2,033,985.83
05/01/2031 7,953,985.83
11/01/2031 1 ,862,690.63
05/01/2032 8,002,690.63
11/01/2032 1,685,029.73
05/01/2033 8,060,029.73
11/01/2033 1,500,569.10
05/01/2034 8,115,569.10
11/01/2034 1,309,164.08
05/01/2035 8,169,164.08
11101/2035 1,110,669.98
05/01/2036 8,230,669.98
11/01/2036 904,652.78
05/01/2037 8,294,652. 78
11/01/2037 690,823.13
05/01/2038 8,355,823.13
11/01/2038 469,036.35
05/01/2039 8,424,036.35
11101/2039 238,858.43
05/01/2040 8,493,858.43
'In accordance with section 3(c)(i) of the Service Agreement, the amounts listed in the column titled "Payment
Amount" will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount held under the
Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the
interest portion of Bond Payment Obligations on the 2009 Bonds.
A-4
SECOND AMENDMENT
TO
SERVICE AGREEMENT
BETWEEN
COMMONWEALTH FINANCING AUTHORITY
AND
THE COMMONWEALTH OF PENNSYLVANIA (Originally dated as of November 1, 2009)
Relating to the Financing and Implementation of the H2O Grant Program under the
H2O PA Act
Dated as of January 1, 2013
SECOND AMENDMENT TO SERVICE AGREEMENT
This SECOND AMENDMENT TO SERVICE AGREEMENT is dated as of January 1, 2013 (the “Service Agreement Amendment”), and is made between COMMONWEALTH FINANCING AUTHORITY (the “Authority”), an instrumentality of the Commonwealth of Pennsylvania and a body corporate and politic organized and existing under Pennsylvania law, and the COMMONWEALTH OF PENNSYLVANIA (the “Commonwealth”) acting through the Department of Community and Economic Development (the “Department”).
WITNESSETH
WHEREAS, the Authority was created pursuant to 64 Pa.C.S. Section 1501 et seq. (as amended from time-to-time, the “Act”) for the purpose of, among other things, providing financial assistance for certain programs; and
WHEREAS, pursuant to 32 P.S. Section 694 et seq., as amended by Act 50 (the “H2O PA Act”), the Authority may incur indebtedness in an amount up to $800,000,000 in order to provide funds for grants to be used to fund water and sewer projects, storm water projects, flood control projects and high hazard unsafe dam projects (the “H2O Grant Program”); and
WHEREAS, in order to fund the H2O Grant Program established in the H2O PA Act, the Authority previously issued $400,000,000 Revenue Bonds, Series D of 2009 (Federally Taxable-Build America Bonds) (the “2009 Bonds”) and $53,080,000 Revenue Bonds, Series C-1 of 2010 (Tax-Exempt) (the “Series C-1 2010 Bonds”) and $96,920,000 Revenue Bonds, Series C-2 of 2010 (Federally Taxable - Build America Bonds) (the “Series C-2 2010 Bonds”, and together with the Series C-1 2010 Bonds, the “2010 Bonds”); and
WHEREAS, in order to provide additional funding for the H2O Grant Program established in the H2O PA Act, the Authority has authorized the issuance of $207,000,000 Revenue Bonds (Tax-Exempt), Series B of 2013 (the “2013 Bonds”); and
WHEREAS, in order to provide for the authentication and delivery of the 2009 Bonds, to establish and declare the terms and conditions upon which the 2009 Bonds were issued and secured and to secure Obligations (as defined in the Indenture described below), the Authority authorized the execution and delivery of the Trust Indenture (the “Original Indenture”), dated as of November 1, 2009 between the Authority and TD Bank, National Association (the “Original Trustee”), which Original Indenture was supplemented in order to provide for the authentication and delivery of the 2010 Bonds, to establish and declare the terms and conditions upon which the 2010 Bonds were issued and secured and to secure Obligations pursuant to the First Supplemental Indenture dated as of September 1, 2010 between the Authority and the Original Trustee (the “First Supplemental Indenture”); and
WHEREAS, the Original Indenture is being further supplemented in order to provide for the authentication and delivery of the 2013 Bonds, to establish and declare the terms and conditions upon which the 2013 Bonds are to be issued and secured and to secure Obligations pursuant to the Second Supplemental Indenture dated as of January 1, 2013 between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee (the
2
“Trustee”) (the “Second Supplemental Indenture” and the Original Indenture, as supplemented by the First Supplemental Indenture and the Second Supplemental Indenture is herein referred to as the “Indenture”); and
WHEREAS, the Authority and the Commonwealth, acting through the Department executed and delivered a Service Agreement, dated as of November 1, 2009, as amended by a First Amendment to Service Agreement, dated as of September 1, 2010, (as amended, the “Service Agreement”), under which the Department agreed to seek appropriations from the Legislature (as defined in the Original Indenture) in amounts sufficient to pay all Obligations on the 2009 Bonds and the 2010 Bonds and to cause such appropriations to be paid directly to the Authority or its assignee; and
WHEREAS, pursuant to Section 2.12 of the Original Indenture, as a condition to the issuance of the 2013 Bonds as “Additional Bonds,” the Trustee must receive an amendment to the Service Agreement which extends the Department's obligation to make payments thereunder with respect to such Additional Bonds; and
WHEREAS, pursuant to Section 7 of the Service Agreement, upon the Department's receipt of a revised Obligation Payment Schedule (as defined in the Service Agreement) that sets forth “Payment Dates” and “Payment Amounts” with respect to the 2009 Bonds, 2010 Bonds and 2013 Bonds, the Service Agreement shall be automatically amended to extend the Department's obligation to make payments thereunder with respect to the 2013 Bonds; and
NOW, THEREFORE, in consideration of the mutual agreements hereinafter contained, the parties hereto, intending to be legally bound hereby, agree as follows:
1. Amendments to the Service Agreement. The Service Agreement is amended as follows:
(a) Section 2. - Term. Section 2 of the Service Agreement is hereby amended by deleting the date “June 1, 2040” in the second line thereof, and inserting in its place the date “June 1, 2042”; and
(b) Exhibit “A”. Exhibit “A” to the Service Agreement, entitled “Obligation Payment Schedule”, that sets forth “Payment Dates” and “Payment Amounts” with respect to the 2009 Bonds and 2010 Bonds, is hereby deleted in its entirety, and in lieu thereof a new Exhibit “A” entitled “Obligation Payment Schedule (H2O PA Act)”, that sets forth “Payment Dates” and “Payment Amounts” with respect to the 2009 Bonds, 2010 Bonds and 2013 Bonds, is added to the Service Agreement, as set forth in Exhibit “A” attached hereto.
2. Sufficiency of Legislative Appropriation to the Department. The Department hereby acknowledges and confirms that: (i) sufficient moneys have been appropriated by the Legislature to make all Service Fee payments that are shown on the amended Obligation Payment Schedule set forth in Exhibit “A” hereto to be due and payable during the fiscal year ending June 30, 2013; and (ii) the Department has submitted a request to the Secretary of the Budget in a timely manner for appropriations of sufficient moneys to allow the Department to make all Service Fee payments that are shown on the amended Obligation
3
Payment Schedule set forth in Exhibit “A” hereto to be due and payable during the fiscal year ending June 30, 2014.
3. Full Force and Effect. Unless deleted, added or otherwise amended by Section 1 of this Service Agreement Amendment, all the remaining terms and conditions of the Service Agreement shall remain in full force and effect according to its terms.
4. Counterparts. This Service Agreement Amendment may be executed in two or more counterparts, each of which will be deemed an original, but together will constitute one and the same instrument.
4
IN WITNESS WHEREOF, the parties have caused this Service Agreement Amendment to be executed by their duly authorized officers and the Authority has caused it seal to be hereunto affixed and duly attested, as of the day and year first above written.
COMMONWEALTH FINANCING AUTHORITY
By:_______________________________________ Executive Director
Attest:
[SEAL] __________________________________________ Secretary
COMMONWEALTH OF PENNSYLVANIA, acting through the Department of Community and Economic Development
By:_______________________________________ Secretary of Community and Economic Development
Witness:
__________________________________________ Chief Counsel, Department of Community and Economic Development
Signature Page to Service Agreement Amendment (H2O PA Act)
A-1
EXHIBIT “A”
OBLIGATION PAYMENT SCHEDULE (H2O PA ACT)
Commonwealth Financing Authority, Pennsylvania
Revenue Bonds, Series D of 2009
Payment Date Payment Amount*
05/01/2013 $20,865,750.98 11/01/2013 11,489,794.68 05/01/2014 20,909,794.68 11/01/2014 11,313,970.38 05/01/2015 20,963,970.38 11/01/2015 11,112,285.38 05/01/2016 21,022,285.38 11/01/2016 10,887,823.88 05/01/2017 21,087,823.88 11/01/2017 10,640,320.88 05/01/2018 21,165,320.88 11/01/2018 10,374,406.75 05/01/2019 21,239,406.75 11/01/2019 10,095,556.53 05/01/2020 21,325,556.53 11/01/2020 9,778,140.58 05/01/2021 21,418,140.58 11/01/2021 9,449,135.98 05/01/2022 21,514,135.98 11/01/2022 9,108,118.75 05/01/2023 21,618,118.75 11/01/2023 8,754,523.60 05/01/2024 21,724,523.60 11/01/2024 8,387,926.55 05/01/2025 21,832,926.55
________________________ * In accordance with section 3(c)(i) of the Service Agreement, the amounts listed in the column titled “Payment Amount” will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount with respect to the 2009 Bonds held under the Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the interest portion of Bond Payment Obligations on the 2009 Bonds.
A-2
Commonwealth Financing Authority, Pennsylvania
Revenue Bonds, Series D of 2009
Payment Date Payment Amount*
11/01/2025 $ 7,969,921.50 05/01/2026 21,954,921.50 11/01/2026 7,535,127.85 05/01/2027 22,085,127.85 11/01/2027 7,082,768.35 05/01/2028 22,217,768.35 11/01/2028 6,612,221.20 05/01/2029 22,357,221.20 11/01/2029 6,122,709.15 05/01/2030 22,502,709.15 11/01/2030 5,613,454.95 05/01/2031 22,653,454.95 11/01/2031 5,083,681.35 05/01/2032 22,808,681.35 11/01/2032 4,532,611.10 05/01/2033 22,972,611.10 11/01/2033 3,959,311.50 05/01/2034 23,144,311.50 11/01/2034 3,362,849.85 05/01/2035 23,322,849.85 11/01/2035 2,742,293.45 05/01/2036 23,502,293.45 11/01/2036 2,096,865.05 05/01/2037 23,696,865.05 11/01/2037 1,425,321.05 05/01/2038 23,895,321.05 11/01/2038 726,728.75 05/01/2039 24,101,728.75
________________________ * In accordance with section 3(c)(i) of the Service Agreement, the amounts listed in the column titled “Payment Amount” will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount with respect to the 2009 Bonds held under the Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the interest portion of Bond Payment Obligations on the 2009 Bonds.
A-3
Commonwealth Financing Authority, Pennsylvania
Revenue Bonds, Series C of 2010
Payment Date Payment Amount*
05/01/2013 $ 6,726,611.45 11/01/2013 3,737,436.45 05/01/2014 6,772,436.45 11/01/2014 3,691,911.45 05/01/2015 6,816,911.45 11/01/2015 3,645,036.45 05/01/2016 6,865,036.45 11/01/2016 3,596,736.45 05/01/2017 6,911,736.45 11/01/2017 3,530,436.45 05/01/2018 6,975,436.45 11/01/2018 3,451,811.45 05/01/2019 7,056,811.45 11/01/2019 3,377,211.45 05/01/2020 7,132,211.45 11/01/2020 3,283,336.45 05/01/2021 7,223,336.45 11/01/2021 3,184,836.45 05/01/2022 7,324,836.45 11/01/2022 3,081,336.45 05/01/2023 7,426,336.45 11/01/2023 2,972,711.45 05/01/2024 7,537,711.45 11/01/2024 2,858,586.45 05/01/2025 7,648,586.45 11/01/2025 2,777,755.20 05/01/2026 7,732,755.20 11/01/2026 2,639,337.28 05/01/2027 7,769,337.28
_____________________________ * In accordance with section 3(c)(i) of the Service Agreement, the amounts listed in the column titled “Payment Amount” will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount with respect to the 2010 Bonds held under the Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the interest portion of Bond Payment Obligations on the 2010 Bonds.
A-4
Commonwealth Financing Authority, Pennsylvania
Revenue Bonds, Series C of 2010
Payment Date Payment Amount*
11/01/2027 $ 2,496,030.73 05/01/2028 7,816,030.73 11/01/2028 2,347,416.53 05/01/2029 7,857,416.53 11/01/2029 2,193,494.68 05/01/2030 7,903,494.68 11/01/2030 2,033,985.83 05/01/2031 7,953,985.83 11/01/2031 1,862,690.63 05/01/2032 8,002,690.63 11/01/2032 1,685,029.73 05/01/2033 8,060,029.73 11/01/2033 1,500,569.10 05/01/2034 8,115,569.10 11/01/2034 1,309,164.08 05/01/2035 8,169,164.08 11/01/2035 1,110,669.98 05/01/2036 8,230,669.98 11/01/2036 904,652.78 05/01/2037 8,294,652.78 11/01/2037 690,823.13 05/01/2038 8,355,823.13 11/01/2038 469,036.35 05/01/2039 8,424,036.35 11/01/2039 238,858.43 05/01/2040 8,493,858.43
_____________________________ * In accordance with section 3(c)(i) of the Service Agreement, the amounts listed in the column titled “Payment Amount” will be reduced by amounts on deposit in the Interest Subsidy Payment Subaccount with respect to the 2010 Bonds held under the Indenture. Such amounts in the Interest Subsidy Payment Subaccount will be applied towards the payment of the interest portion of Bond Payment Obligations on the 2010 Bonds.
A-5
Commonwealth Financing Authority, Pennsylvania
Revenue Bonds, Series B of 2013
Payment Date Payment Amount
11/01/2013 $ 8,648,303.13 05/01/2014 5,144,203.13 11/01/2014 5,052,853.13 05/01/2015 8,737,853.13 11/01/2015 4,979,153.13 05/01/2016 8,814,153.13 11/01/2016 4,902,453.13 05/01/2017 8,892,453.13 11/01/2017 4,822,653.13 05/01/2018 8,967,653.13 11/01/2018 4,719,028.13 05/01/2019 9,074,028.13 11/01/2019 4,610,153.13 05/01/2020 9,180,153.13 11/01/2020 4,500,403.13 05/01/2021 9,290,403.13 11/01/2021 4,380,653.13 05/01/2022 9,410,653.13 11/01/2022 4,254,903.13 05/01/2023 9,534,903.13 11/01/2023 4,122,903.13 05/01/2024 9,667,903.13 11/01/2024 4,002,090.63 05/01/2025 9,792,090.63 11/01/2025 3,857,340.63 05/01/2026 9,937,340.63 11/01/2026 3,705,340.63 05/01/2027 10,085,340.63 11/01/2027 3,557,640.63 05/01/2028 10,232,640.63 11/01/2028 3,390,765.63 05/01/2029 10,400,765.63 11/01/2029 3,215,515.63 05/01/2030 10,575,515.63 11/01/2030 3,031,515.63 05/01/2031 10,761,515.63 11/01/2031 2,838,265.63 05/01/2032 10,953,265.63
A-6
Commonwealth Financing Authority, Pennsylvania Revenue Bonds, Series B of 2013
Payment Date Payment Amount
11/01/2032 $ 2,635,390.63 05/01/2033 11,155,390.63 11/01/2033 2,450,625.00 05/01/2034 11,340,625.00 11/01/2034 2,228,375.00 05/01/2035 11,563,375.00 11/01/2035 1,995,000.00 05/01/2036 11,795,000.00 11/01/2036 1,750,000.00 05/01/2037 12,040,000.00 11/01/2037 1,492,750.00 05/01/2038 12,297,750.00 11/01/2038 1,222,625.00 05/01/2039 12,567,625.00 11/01/2039 939,000.00 05/01/2040 12,854,000.00 11/01/2040 641,125.00 05/01/2041 13,151,125.00 11/01/2041 328,375.00 05/01/2042 13,463,375.00
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APPENDIX E-1
FORM OF OPINION OF BOND COUNSEL FOR 2013A BONDS
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APPENDIX E-1
BELOW IS THE PROPOSED FORM OF OPINION OF BOND COUNSEL EXPECTED TO BE DELIVERED IN CONNECTION WITH THE ISSUANCE
OF THE 2013A BONDS
January 23, 2013
RE: Commonwealth Financing Authority $75,000,000 Revenue Bonds (Federally Taxable), Series A-1 of 2013 $48,000,000 Revenue Bonds (Tax-Exempt), Series A-2 of 2013 TO THE PURCHASERS OF THE REFERENCED BONDS:
We have served as Bond Counsel to the Commonwealth Financing Authority (the “Authority”) in connection with the issuance of its $75,000,000 Revenue Bonds (Federally Taxable), Series A-1 of 2013 (the “Series A-1 Bonds”) and its $48,000,000 Revenue Bonds (Tax-Exempt), Series A-2 of 2013 (the “Series A-2 Bonds,” and together with the Series A-1 Bonds, the “2013A Bonds”). The 2013A Bonds are issued under and pursuant to 64 P.C.S. Section 1501 et seq., as amended (the “Act”), 73 P.S. Section 1649.101 et seq. (the “Alternative Energy Act”) and the Trust Indenture dated as of May 1, 2009, as previously supplemented by the First Supplemental Trust Indenture dated as of April 15, 2010 (as supplemented, the “Existing Indenture”), and as further supplemented and amended by the Second Supplemental Trust Indenture dated as of January 1, 2013 (the “Second Supplemental Indenture,” and, together with the Existing Indenture, the “Indenture”), between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee (the “Trustee”), and pursuant to a resolution of the Authority adopted on January 25, 2012 (the “Resolution”). Simultaneously with the issuance of the 2013A Bonds, the Authority is issuing its $207,000,000 Revenue Bonds (Tax-Exempt), Series B of 2013 (the “2013B Bonds”).
The 2013A Bonds are fixed rate bonds dated their date of issuance, and will bear interest from such dated date at the rates, and mature in the amounts and on the dates, set forth in the Official Statement of the Authority related to the 2013A Bonds. The 2013A Bonds will be issued only as fully registered bonds in denominations of $5,000 and integral multiples of $5,000 in excess thereof. The 2013A Bonds are subject to redemption prior to maturity as more fully described in the Indenture.
The 2013A Bonds are being issued to finance a project (the “Project”) which consists of: (i) financing portions of the Alternative Energy Development Program established in the Alternative Energy Act and other Project Costs (as defined in the Indenture) for program-related administration; and (ii) the payment of costs of issuing the 2013A Bonds.
The Authority has entered into a Service Agreement dated as of May 1, 2009, as previously amended by the First Amendment to Service Agreement dated as of April 15, 2010 (as amended, the “Existing Service Agreement”), and as further amended by a Second Amendment to Service Agreement dated as of January 1, 2013 (the “Second Amendment to Service Agreement,” and, together with the Existing Service Agreement, the “Service Agreement”), with the Commonwealth of Pennsylvania (the “Commonwealth”) acting through the Department of Community and Economic Development (the “Department”) pursuant to which the Department agrees to seek appropriations from the Pennsylvania
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General Assembly in amounts sufficient to pay, among other things, debt service on the 2013A Bonds and to cause such appropriations to be paid directly to the Authority or its assignee. Pursuant to the Indenture, such payments due from the Department under the Service Agreement have been assigned to the Trustee as security for the 2013A Bonds.
We have examined the proceedings relating to the authorization and issuance of the 2013A Bonds, including, among other things: (a) the Act, the Alternative Energy Act and the By-Laws of the Authority; (b) a certified copy of the Resolution; (c) certified copies of the Existing Indenture and the Existing Service Agreement and executed copies of the Second Supplemental Indenture and the Second Amendment to Service Agreement; (d) certificates executed by the Authority and the Trustee as to the execution and authentication of the 2013A Bonds; (e) various other certificates executed by the Authority, the Department of Environmental Protection of the Commonwealth (the “PADEP”) and the Ben Franklin Technology Development Authority (the “BFTDA”), including a certificate with regard to Sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended (the “Code”); (f) the opinion of Buchanan Ingersoll & Rooney PC, counsel to the Authority on which we have relied; (g) the opinion of Chief Counsel for the Department; and (h) the Form 8038-G of the Authority with respect to the Series A-2 Bonds. In rendering our opinion, we have assumed the accuracy of and not undertaken to verify the factual matters set forth in such agreements, certificates and other documents by independent investigation and have relied on the covenants, warranties and representations made by the Authority, the PADEP, the BFTDA and the Department in such certificates and in the Indenture, the Service Agreement and other financing documents.
In addition, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity with originals of all documents submitted to us as copies and the authenticity of certificates of public officials. We have also assumed that the Indenture has been duly authorized by the Trustee and is a legally binding obligation of, and enforceable in accordance with its terms against, the Trustee and that the Service Agreement has been duly authorized by the Commonwealth and is a legally binding obligation of, and enforceable in accordance with its terms against, the Commonwealth.
From our examination of the foregoing and such other items as we deem relevant, we are of the opinion that:
1. The Authority is a body corporate and politic, is validly existing under the laws of the Commonwealth and has the corporate power to enter into the Second Supplemental Indenture and the Second Amendment to Service Agreement and to issue and deliver the 2013A Bonds.
2. The 2013A Bonds have been duly authorized, executed and delivered by the Authority, are valid and binding special obligations of the Authority, payable as to principal, interest and all other obligations thereunder solely from and enforceable only against the revenues and receipts derived from the Service Agreement and any other properties and rights assigned or pledged under the Indenture as security for the debt evidenced by the 2013A Bonds, except as such enforcement may be limited by laws relating to bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws affecting creditors' rights generally and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and to the exercise of judicial discretion in appropriate cases.
3. The Second Supplemental Indenture and the Second Amendment to Service Agreement have been duly authorized, executed and delivered by the Authority, and each of the Second Supplemental Indenture and the Second Amendment to Service Agreement is enforceable against the
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January 23, 2013 Page 3
Authority in accordance with its terms, except as such enforcement may be limited by laws relating to bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws affecting creditors' rights generally and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and to the exercise of judicial discretion in appropriate cases.
4. Under existing laws of the Commonwealth, the interest on the 2013A Bonds is free from Pennsylvania personal income taxation and Pennsylvania corporate net income taxation, but such exemption does not extend to gift, estate, succession or inheritance taxes or any other taxes not levied or assessed directly on the 2013A Bonds or the interest thereon.
5. Interest on the Series A-2 Bonds is excluded from gross income for purposes of federal income taxation under existing statutes, regulations, rulings and court decisions. The opinion set forth in the preceding sentence is subject to the condition that the Authority, the PADEP and the BFTDA comply with all applicable federal income tax law requirements related to the Series A-2 Bonds and the 2013B Bonds that must be satisfied subsequent to the issuance of the Series A-2 Bonds and the 2013B Bonds in order that interest on the Series A-2 Bonds continues to be excluded from gross income for purposes of federal income taxation. The Authority, the PADEP and the BFTDA have covenanted to comply with all such requirements. Failure to comply with certain of such requirements could cause the interest on the Series A-2 Bonds to be includable in gross income retroactive to the date of issuance of the Series A-2 Bonds. Interest on the Series A-2 Bonds is not treated as an item of tax preference under Section 57 of the Code for purposes of the individual and corporate alternative minimum taxes; however, we call to your attention that under the Code, to the extent that interest on the Series A-2 Bonds is a component of a corporate holder’s “adjusted current earnings,” a portion of that interest may be subject to the corporate alternative minimum tax. We express no opinion regarding any other federal tax consequences relating to the Series A-2 Bonds or the receipt of interest thereon. We express no opinion regarding federal tax consequences relating to the Series A-1 Bonds or the receipt of interest thereon.
We express no opinion herein on the adequacy, completeness or accuracy of any official statement, placement memorandum or other disclosure document pertaining to the offering of the 2013A Bonds. We also express no opinion as to the validity or enforceability of any provision which purports to require that provisions of an agreement may be amended or waived only in writing.
We call to your attention that the 2013A Bonds do not pledge the general credit or taxing power of the Commonwealth or any political subdivision, agency or instrumentality of the Commonwealth, nor shall the Commonwealth or any political subdivision, agency or instrumentality thereof be liable for the payment of the principal of or interest on the 2013A Bonds (other than the Authority, to the limited extent described herein). Payments under the Service Agreement are subject to the annual appropriation of funds for such purpose by the Pennsylvania General Assembly, and there can be no assurance that such funds will be appropriated in any fiscal year of the Commonwealth.
This opinion is limited to the matters expressly stated herein. No implied opinions are to be inferred to extend this opinion beyond the matters expressly stated herein. This opinion is expressed as of the date hereof. We do not assume any obligation to update or supplement this opinion to reflect, or otherwise advise you of, any facts or circumstances which may hereafter come to our attention or any changes in facts, circumstances or law which may hereafter occur.
Very truly yours,
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APPENDIX E-2
FORM OF OPINION OF BOND COUNSEL FOR 2013B BONDS
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APPENDIX E-2
BELOW IS THE PROPOSED FORM OF OPINION OF BOND COUNSEL EXPECTED TO BE DELIVERED IN CONNECTION WITH THE ISSUANCE
OF THE 2013B BONDS
January 23, 2013
RE: Commonwealth Financing Authority $207,000,000 Revenue Bonds (Tax-Exempt), Series B of 2013 TO THE PURCHASERS OF THE REFERENCED BONDS:
We have served as Bond Counsel to the Commonwealth Financing Authority (the “Authority”) in connection with the issuance of its $207,000,000 Revenue Bonds (Tax-Exempt), Series B of 2013 (the “2013B Bonds”). The 2013B Bonds are issued under and pursuant to 64 P.C.S. Section 1501 et seq., as amended (the “Act”), 32 P.S. Section 694.101 et seq. (the “H2O PA Act”), certain amendments to Pennsylvania’s Fiscal Code, 72 P.S. Section 1 et seq., contained in Act No. 50 of the Commonwealth of Pennsylvania (the “Commonwealth”) approved October 9, 2009 (“Act No. 50”), and the Trust Indenture dated as of November 1, 2009, as previously supplemented by the First Supplemental Indenture dated as of September 1, 2010 (as supplemented, the “Existing Indenture”), and as further supplemented and amended by the Second Supplemental Indenture dated as of January 1, 2013 (the “Second Supplemental Indenture,” and, together with the Existing Indenture, the “Indenture”), between the Authority and The Bank of New York Mellon Trust Company, N.A., as successor trustee (the “Trustee”), and pursuant to a resolution of the Authority adopted on January 25, 2012 (the “Resolution”). Simultaneously with the issuance of the 2013B Bonds, the Authority is issuing its $75,000,000 Revenue Bonds (Federally Taxable), Series A-1 of 2013 and its $48,000,000 Revenue Bonds (Tax-Exempt), Series A-2 of 2013 (the “Series A-2 Bonds”).
The 2013B Bonds are fixed rate bonds dated their date of issuance, and will bear interest from such dated date at the rates, and mature in the amounts and on the dates, set forth in the Official Statement of the Authority related to the 2013B Bonds. The 2013B Bonds will be issued only as fully registered bonds in denominations of $5,000 and integral multiples of $5,000 in excess thereof. The 2013B Bonds are subject to redemption prior to maturity as more fully described in the Indenture.
The 2013B Bonds are being issued to finance a project (the “Project”) which consists of: (i) providing additional funds for grants to be used to fund water and sewer projects, storm water projects, flood control projects and high hazard unsafe dam projects pursuant to the H2O PA Act and Act No. 50 and other Project Costs (as defined in the Indenture) for program-related administration; and (ii) the payment of costs of issuing the 2013B Bonds.
The Authority has entered into a Service Agreement dated as of November 1, 2009, as previously amended by the First Amendment to Service Agreement dated as of September 1, 2010 (as amended, the “Existing Service Agreement”), and as further amended by a Second Amendment to Service Agreement dated as of January 1, 2013 (the “Second Amendment to Service Agreement,” and, together with the Existing Service Agreement, the “Service Agreement”), with the Commonwealth acting through the Department of Community and Economic Development (the “Department”) pursuant to which the
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January 23, 2013 Page 2
Department agrees to seek appropriations from the Pennsylvania General Assembly in amounts sufficient to pay, among other things, debt service on the 2013B Bonds and to cause such appropriations to be paid directly to the Authority or its assignee. Pursuant to the Indenture, such payments due from the Department under the Service Agreement have been assigned to the Trustee as security for the 2013B Bonds.
We have examined the proceedings relating to the authorization and issuance of the 2013B Bonds, including, among other things: (a) the Act, the H2O PA Act, Act No. 50 and the By-Laws of the Authority; (b) a certified copy of the Resolution; (c) certified copies of the Existing Indenture and the Existing Service Agreement and executed copies of the Second Supplemental Indenture and the Second Amendment to Service Agreement; (d) certificates executed by the Authority and the Trustee as to the execution and authentication of the 2013B Bonds; (e) various other certificates executed by the Authority, the Department of Environmental Protection of the Commonwealth (the “PADEP”) and the Ben Franklin Technology Development Authority (the “BFTDA”), including a certificate with regard to Sections 103 and 141 through 150 of the Internal Revenue Code of 1986, as amended (the “Code”); (f) the opinion of Buchanan Ingersoll & Rooney PC, counsel to the Authority on which we have relied; (g) the opinion of Chief Counsel for the Department; and (h) the Form 8038-G of the Authority with respect to the 2013B Bonds. In rendering our opinion, we have assumed the accuracy of and not undertaken to verify the factual matters set forth in such agreements, certificates and other documents by independent investigation and have relied on the covenants, warranties and representations made by the Authority, the PADEP, the BFTDA and the Department in such certificates and in the Indenture, the Service Agreement and other financing documents.
In addition, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity with originals of all documents submitted to us as copies and the authenticity of certificates of public officials. We have also assumed that the Indenture has been duly authorized by the Trustee and is a legally binding obligation of, and enforceable in accordance with its terms against, the Trustee and that the Service Agreement has been duly authorized by the Commonwealth and is a legally binding obligation of, and enforceable in accordance with its terms against, the Commonwealth.
From our examination of the foregoing and such other items as we deem relevant, we are of the opinion that:
1. The Authority is a body corporate and politic, is validly existing under the laws of the Commonwealth and has the corporate power to enter into the Second Supplemental Indenture and the Second Amendment to Service Agreement and to issue and deliver the 2013B Bonds.
2. The 2013B Bonds have been duly authorized, executed and delivered by the Authority, are valid and binding special obligations of the Authority, payable as to principal, interest and all other obligations thereunder solely from and enforceable only against the revenues and receipts derived from the Service Agreement and any other properties and rights assigned or pledged under the Indenture as security for the debt evidenced by the 2013B Bonds, except as such enforcement may be limited by laws relating to bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws affecting creditors' rights generally and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and to the exercise of judicial discretion in appropriate cases.
3. The Second Supplemental Indenture and the Second Amendment to Service Agreement have been duly authorized, executed and delivered by the Authority, and each of the Second
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January 23, 2013 Page 3
Supplemental Indenture and the Second Amendment to Service Agreement is enforceable against the Authority in accordance with its terms, except as such enforcement may be limited by laws relating to bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws affecting creditors' rights generally and subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and to the exercise of judicial discretion in appropriate cases.
4. Under existing laws of the Commonwealth, the interest on the 2013B Bonds is free from Pennsylvania personal income taxation and Pennsylvania corporate net income taxation, but such exemption does not extend to gift, estate, succession or inheritance taxes or any other taxes not levied or assessed directly on the 2013B Bonds or the interest thereon.
5. Interest on the 2013B Bonds is excluded from gross income for purposes of federal income taxation under existing statutes, regulations, rulings and court decisions. The opinion set forth in the preceding sentence is subject to the condition that the Authority, the PADEP and the BFTDA comply with all applicable federal income tax law requirements related to the 2013B Bonds and the Series A-2 Bonds that must be satisfied subsequent to the issuance of the 2013B Bonds and the Series A-2 Bonds in order that interest on the 2013B Bonds continues to be excluded from gross income for purposes of federal income taxation. The Authority, the PADEP and the BFTDA have covenanted to comply with all such requirements. Failure to comply with certain of such requirements could cause the interest on the 2013B Bonds to be includable in gross income retroactive to the date of issuance of the 2013B Bonds. Interest on the 2013B Bonds is not treated as an item of tax preference under Section 57 of the Code for purposes of the individual and corporate alternative minimum taxes; however, we call to your attention that under the Code, to the extent that interest on the 2013B Bonds is a component of a corporate holder’s “adjusted current earnings,” a portion of that interest may be subject to the corporate alternative minimum tax. We express no opinion regarding any other federal tax consequences relating to the 2013B Bonds or the receipt of interest thereon.
We express no opinion herein on the adequacy, completeness or accuracy of any official statement, placement memorandum or other disclosure document pertaining to the offering of the 2013B Bonds. We also express no opinion as to the validity or enforceability of any provision which purports to require that provisions of an agreement may be amended or waived only in writing.
We call to your attention that the 2013B Bonds do not pledge the general credit or taxing power of the Commonwealth or any political subdivision, agency or instrumentality of the Commonwealth, nor shall the Commonwealth or any political subdivision, agency or instrumentality thereof be liable for the payment of the principal of or interest on the 2013B Bonds (other than the Authority, to the limited extent described herein). Payments under the Service Agreement are subject to the annual appropriation of funds for such purpose by the Pennsylvania General Assembly, and there can be no assurance that such funds will be appropriated in any fiscal year of the Commonwealth.
This opinion is limited to the matters expressly stated herein. No implied opinions are to be inferred to extend this opinion beyond the matters expressly stated herein. This opinion is expressed as of the date hereof. We do not assume any obligation to update or supplement this opinion to reflect, or otherwise advise you of, any facts or circumstances which may hereafter come to our attention or any changes in facts, circumstances or law which may hereafter occur.
Very truly yours,
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APPENDIX F
FORM OF CONTINUING DISCLOSURE AGREEMENT
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F-1
APPENDIX F
FORM OF CONTINUING DISCLOSURE AGREEMENT This CONTINUING DISCLOSURE AGREEMENT dated January 23, 2013 (the “Agreement”), is executed and delivered by the Commonwealth Financing Authority (the “Authority”) and the Commonwealth of Pennsylvania (the “Commonwealth”), in connection with the Authority's issuance of its $330,000,000 Revenue Bonds, Series 2013, consisting of $75,000,000 Revenue Bonds (Federally Taxable), Series A-1 of 2013 (the “Series A-1 Bonds”), $48,000,000 Revenue Bonds (Tax-Exempt), Series A-2 of 2013 (the “Series A-2 Bonds”) and $207,000,000 Revenue Bonds (Tax-Exempt), Series B of 2013 (the “Series B Bonds” and, together with the Series A-1 Bonds and the Series A-2 Bonds, the “Bonds”). The Authority and the Commonwealth hereby covenant and agree as follows: Section 1. Purpose. This Agreement is being executed and delivered by the Authority and the Commonwealth for the benefit of the holders and the beneficial owners of the Bonds and in order to assist the underwriters purchasing the Bonds to comply with the provisions of Section (b)(5)(i) of Rule 15c2-12 (the “Rule”) promulgated by the Securities and Exchange Commission by undertaking to provide certain annual financial information and material event notices required by the Rule (collectively, “Continuing Disclosure”). Section 2. Annual Disclosure. (a) So long as any Bonds are outstanding, the Commonwealth annually shall provide financial information and operating data in accordance with the provisions of Section (b)(5)(i) of the Rule as follows:
(i) audited financial statements of the Commonwealth, prepared in accordance with generally accepted accounting principles; and (ii) unless included in such financial statements, operating data with respect to the Commonwealth and its operations of the type found in the following tables in the Official Statement for the Bonds dated January 15, 2013: (a) in Tables 5 through 10 under the heading “COMMONWEALTH FINANCIAL PERFORMANCE” in APPENDIX A; (b) in Tables 11 and 12 under the heading “COMMONWEALTH REVENUES AND EXPENDITURES” in APPENDIX A; (c) in Tables 15 through 19 under the heading “OUTSTANDING INDEBTEDNESS OF THE COMMONWEALTH” in Appendix A, and (d) Tables 20 through 24 under the heading “OTHER STATE RELATED OBLIGATIONS” in APPENDIX A. If any of the tables listed above reflect information that is no longer calculated and available or relevant because of changes in operations, the Commonwealth will provide notice of such change in the first annual filing of annual operating data after such changes are undertaken. The format of such information may be altered from that set forth in the Official Statement.
If the audited financial statements to be filed pursuant to Section 2(a)(i) are not available by the date of the required filing, the Commonwealth may instead file unaudited statements by such date and file audited statements when available. (b) The Commonwealth shall provide annually the financial information and operating data described in subsection (a) above (collectively, the “Annual Disclosure”) within 240 days after the end of the Commonwealth's fiscal year, commencing with the Commonwealth's fiscal year ending June 30, 2013, to the Municipal Securities Rulemaking Board (“MSRB”) via the Electronic Municipal Market Access system, or any successor thereto (“EMMA”).
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(c) The Annual Disclosure may be included by specific reference to other documents available to the public on the MSRB internet website (presently www.msrb.org) or filed with the SEC. (d) The Commonwealth shall provide in a timely manner to the MSRB via EMMA notice specifying any failure of the Commonwealth to provide the Annual Disclosure by the date specified. Section 3. Event Disclosure. So long as any Bonds are outstanding, the Authority shall provide in a timely manner, not in excess of ten days, to the MSRB notice of the occurrence of any of the following events with respect to the Bonds:
(a) Principal and interest payment delinquencies; (b) Non-payment related defaults, if material; (c) Unscheduled draws on debt service reserves reflecting financial difficulties; (d) Unscheduled draws on credit enhancements reflecting financial difficulties; (e) Substitution of credit or liquidity providers, or their failure to perform; (f) Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Series A-2 Bonds or the Series B Bonds, or other material events affecting the tax status of the Series A-2 Bonds or the Series B Bonds; (g) Modifications to rights of security holders, if material; (h) Bond calls, if material, and tender offers; (i) Defeasances; (j) Release, substitution, or sale of property securing repayment of the Bonds; (k) Rating changes; (l) Bankruptcy, insolvency, receivership or similar event of the obligated person; (m) The consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (n) Appointment of a successor or additional trustee or the change of name of a trustee, if material. For the purposes of the event identified in paragraph (l) above, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for an obligated person in a proceeding under the U.S. Bankruptcy Code or in any other
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proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the obligated person, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the obligated person.
Section 4. Termination. The obligations of the Authority and the Commonwealth hereunder will terminate upon the redemption, defeasance (within the meaning of the Rule) or payment in full of all the Bonds. Section 5. Amendment. The Authority and the Commonwealth may modify their respective obligations hereunder without the consent of Bondholders, provided that this Agreement as so modified complies with the Rule as it exists at the time of modification. The Authority or the Commonwealth, as applicable, shall within a reasonable time thereafter send to the MSRB a description of such modification(s). Section 6. Defaults. (a) If the Authority or the Commonwealth fails to comply with any covenant or obligation regarding Continuing Disclosure specified in this Agreement, any holder (within the meaning of the Rule) of Bonds then outstanding may, by notice to the Authority or the Commonwealth, as applicable, proceed to protect and enforce its rights and the rights of the holders by an action for specific performance of such covenant to provide the Continuing Disclosure; provided that any holder seeking to require compliance by the Commonwealth with this Agreement shall first provide to the Commonwealth’s Office of the Budget at least 30 days’ prior written notice of the Commonwealth's failure, giving reasonable details of such failure, following which notice, the Commonwealth shall have 30 days to comply. (b) Notwithstanding anything herein to the contrary, any failure of the Authority or the Commonwealth to comply with any obligation regarding Continuing Disclosure specified in this Agreement (i) shall not be deemed to constitute an event of default under the Bonds or the resolutions or other documents providing for the issuance of the Bonds and (ii) shall not give rise to any right or remedy other than that described in Section 6(a) above. Section 7. Additional Disclosure. The Authority or the Commonwealth may from time to time disclose certain information and data in addition to the Continuing Disclosure. Notwithstanding anything herein to the contrary, neither the Authority nor the Commonwealth shall incur any obligation to continue to provide, or to update, such additional information or data. Section 8. Filing Format. Any information, document, data and/or notice submitted to the MSRB via EMMA hereunder shall be submitted in electronic format and shall be accompanied by identifying information, all as prescribed by the MSRB. Section 9. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. Section 10. Successors and Assigns. All of the covenants, promises and agreements contained in this Continuing Disclosure Agreement by or on behalf of the Authority shall bind and inure to the benefit of their respective successors and assigns, whether so expressed or not.
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Section 11. Headings for Convenience Only. The descriptive headings in this Continuing Disclosure Agreement are inserted for convenience of reference only and shall not control or affect the meaning or construction of any of the provisions hereof. Section 12. Compliance with Disclosure Obligations. The Authority and the Commonwealth represent and warrant that, as of the date hereof, the Authority and the Commonwealth have complied in all respects with their respective reporting obligations under each prior agreement entered into by them as required by the Rule in connection with their prior outstanding debt obligations.
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IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date and year first above written.
COMMONWEALTH FINANCING AUTHORITY By: Executive Director COMMONWEALTH OF PENNSYLVANIA By: Secretary of Budget
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