From major airports, to the US power grid, to cities, towns and counties across the country, cybersecurity related issues are unfortunately frequent headlines, particularly in recent years. Cybersecurity issues have become real and ongoing threats to both the operations as well as the financial health of governmental entities. Like any risk, cybersecurity issues also have impact on issuers of municipal bonds. As a part of any rating process, issuers are asked to address myriad questions that relate to their financial stability, reserves and any hidden risks or liabilities. Traditionally, when evaluating risks, rating agencies have focused on considerations such as the possibility that looming litigation, deferred maintenance of assets, pension liabilities and environmental risks. With recent attacks on the IT systems of local government, rating agencies now ask questions pertaining to the security measures that a local government has in place in its evaluation of both direct and indirect risks. The direct risk is the impact on the unit of local government’s finances should an issuer decide to pay a ransom in order to regain control of its own information and systems. The indirect risk is the loss of staff time, recovery of data and potential litigation from data breaches, which may be equally costly to the local government. Cybersecurity issues are also a concern around the transfer of bond proceeds at the time of closing. Issuers of municipal debt have very public borrowings, often multi-million dollars are transferred in conjunction with these closings. For transparency purposes, many of these transactions are publicly disclosed in offering documents, and these offering documents may even disclose how the issuer addresses cybersecurity, including whether the issuer has cybersecurity insurance to limit its financial exposure. Issuers must be very aware of security considerations around issuing its bonds to ensure that the funds are not misdirected or intercepted. In recent years, hackers have intercepted and changed wiring instructions as well as impersonated leaders of companies to instruct financial officers to make fraudulent fund transfers. Fraudulent activity may occur during the bond closing, but also may occur in conjunction with other debt-related wire transfers of the issuer during the life of the bonds. Baker Tilly Municipal Advisors has implemented additional security measures around the release of wiring instructions for bond sales. The firm will continue to evaluate its processes to assist with protection of client data as a part of the fiduciary duty that a municipal advisor has to its clients. We also work in conjunction with financing teams to discuss appropriate cybersecurity disclosures in connection with financings. Whether you are just developing your plan or would like a second opinion about the plan that you have developed, Baker Tilly can assist, contact us for more information.

From major airports, to the U.S. power grid, to cities, towns and counties across the country, cybersecurity related issues are unfortunately frequent headlines, particularly in recent years. 

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Cybersecurity effects on municipal bond issuers

This is our first article in a series, additional insights will be featured in the coming months.  You are an issuer who is looking to issue municipal bonds to finance a project. But where do you start?  First, you need to assemble a team. There are several individuals involved in this process – and some have overlapping responsibilities. Certainly, one of the first calls to make is to your municipal advisor. The Government Finance Officers Association (GFOA) recommends the use of a municipal advisor for the issuance of municipal bonds unless enough expertise exists on the issuer’s staff and there is access to the bond market for information on pricing and selling the bonds. While the issuer retains ultimate control over the financing, the involvement of a municipal advisor provides the issuer with outside expertise to help evaluate decisions that will need to be made throughout the debt issuance process.  The role of the municipal advisor is distinguished from other members of the project team in that municipal advisors have a fiduciary responsibility to the issuer. This responsibility means municipal advisors must always act in the best interests of the issuer and that they possess the expertise needed to execute a deal.  The role of a municipal advisor can vary from project to project and can include, but is not limited to the following:  Financial feasibility – Prepare financing options for the issuer’s consideration, while considering the issuer’s current and future capital needs Method of sale (competitive vs. negotiated) – Provide the issuer with information to determine the method of sale appropriate for the transaction. Assist with the process of underwriter selection, if negotiated.  Marketing of the bonds – Prepare the offering document appropriate for the type of issuance and assistance with the rating on the bonds (if required). Bond sale – Assist with coordinating the sale of bonds. Evaluate bond market conditions and compile information on comparable bonds to assist with pricing of the bonds.  Post-sale –Prepare closing memorandum memorializing important deal information, continuing disclosure filings and arbitrage calculations Municipal Advisors providing advice to issuers related to debt issuance must hold a Series 50 license and be registered with the Securities and Exchange Commission. In our next issue, we will discuss the key roles and responsibilities of other project team members. For more information on this topic, or to learn how Baker Tilly municipal advisory specialists can help, contact our team.

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