Locke Lord QuickStudy: Changes to the Application of Bond and ‎Note Premium Under Massachusetts Law

Locke Lord LLP
January 13, 2022

The law governing the use of bond and note premium received by Massachusetts municipalities and ‎districts, Section 20 of Chapter 44 of the Massachusetts General Laws, was recently amended. Any ‎premium received upon the sale of bonds or notes sold after December 13, 2021, less the cost of ‎preparing, issuing and marketing them, should be applied as follows:‎

‎1.‎ Premium received on notes must be applied to the first payment of interest on the notes. As ‎stated above, this requirement only applies to notes sold after December 13, 2021. Premium ‎received on notes sold on or before December 13, 2021 that has already been reserved for ‎capital projects cannot be used for interest.‎

‎2.‎ Premium received on bonds for which a Proposition 2½ debt exclusion (M.G.L. Chapter 59, ‎Section 21C) has ‎been approved by a municipality must be used to reduce the principal ‎amount of the bonds at the time of sale and applied to costs of the Proposition 2½ excluded ‎project. This reduction requirement also applies to bonds issued by a school district when one ‎or more of the district’s member municipalities has excluded their share of the bonds from ‎Proposition 2½. As before, any premium so applied will reduce the amount authorized to be ‎borrowed for the relevant project.‎

‎3.‎ Premium received on bonds for which a Proposition 2½ debt exclusion has not ‎been approved ‎can either be applied to pay costs of the project being financed by the bonds, thereby reducing ‎the amount authorized to be borrowed for such project,‎ or reserved and appropriated to pay ‎costs of another capital project of the municipality or district. Notably, under the amended law, ‎premium can now be applied to pay costs of any capital project for which the municipality or ‎the district could authorize a borrowing, without regard to useful life.‎

Notwithstanding the application rules above, the amended law allows up to $50,000 of premium ‎received on each purpose of a bond issue to be applied to indebtedness. ‎

In addition to the changes described above, the amendments removed the requirement that ‎borrowing authorizations expressly provide for the application of premium to project costs. This ‎change applies to any borrowing authorization used for a bond sale occurring after the December 13, ‎‎2021 effective date of the amended law.‎

We at Locke Lord would be happy to answer any questions you may have about the matters ‎discussed above. If you have questions, please contact Richard A. Manley Jr., Brenda M. ‎McDonough or Michael H. Meidinger.‎