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- Managing cash flows and the investment of reserve funds to improve the creditworthiness of the entire municipal bond bank pool.

# _2. Review of borrower credit and legal compliance_

A core municipal bond bank function is to conduct a review of the borrower’s credit and maintain the credit strength of the bank’s bonds. Higher credit ratings lead to lower costs of borrowing; therefore, the municipal bond banks actively assess the creditworthiness of a municipal borrower and its impact on the credit quality of the pool. For those municipal borrowers that do not have an independent credit rating the municipal bond banks utilize a similar methodology as the rating agencies though the review is not as extensive as a formal credit rating process. For example, the New Hampshire Municipal Bond Bank developed a quantitative model for credit analysis, drawing from the rating criteria of a rating agency.<sup>34</sup> Key factors include the amount of the requested loan, budget expenditures, revenue sources, annual fiscal balances, the assets, revenues or taxes are being pledged to pay the debt services on the loan, the municipality’s current outstanding debt, any previous defaults by the municipality, the local economy, the largest employers, and population figures.

Another core municipal bond bank function is to ensure that a municipal borrower meets the state’s legal requirements for municipal borrowing. A municipal borrower must submit the opinion of its independent bond counsel as to the due authorization, validity and enforceability of the municipal obligation and that the municipality has complied with the legal requirements for municipal borrowing as provided in state law (as summarized in section A). Additionally, an independent bond counsel to the municipal bond bank conducts a legal review to ensure the due authorization, validity and enforceability of the municipal bond bank bonds, including the compliance of the municipal bond bank with the state’s legal requirements for the issuance of the municipal bond bank bonds.

The legal review relies on the diligence and formal opinions issued by independent bond counsels retained by the municipal borrower and the municipal bond bank, respectively. Legal opinions give comfort to prospective bondholders as to the legal enforceability of the municipal bond bank and municipality to pay their respective obligations.

# _3. Pooling mechanism: maturities, interest rates and yields_

Pooled financing aggregates multiple small loans from municipal borrowers into a larger municipal bond bank bond issue. Municipal bond bank bonds are issued with the primary security of loan repayments from municipalities to the municipal bond bank, including principal and interest payments. This pooling mechanism serves two main purposes: 1) building a diversified pool of loans from multiple borrowers, which enhances the overall credit of the municipal bond bank bonds and lowers the cost of borrowing, and 2) sharing the administrative costs of bond issuance among multiple municipal borrowers.

The municipal bond banks use a basic pooling mechanism to aggregate loans of different amounts and maturities into a single bond issue. A simplified example of a pooled financing bond issue is shown in Table _2_ , below. In this example, the annual principal payments from four loans are aggregated into the annual maturities of a single bond issue. Municipal loans are structured so that principal payments are

> 34 The information in this section is based on reviews of municipal systems and discussions with the staff of the Maine Municipal Bond Bank and New Hampshire Municipal Bond Bank in January 2017.