i.4.2.5 Decision #5 – Understand what the agency commits to do in the future

As a part of the contractual agreement between the public agency and the investor, the agency agrees to perform certain tasks and maintain certain conditions that intend to ensure repayment of the debt. These commitments are typically contained in bond or debt covenants. Among them are commitments on the issuer’s part to procure insurance, ensure the priority of the debt against other obligations, set rates or levy taxes to pay debt service or maintain coverage (if legally permitted),26 and provide financial information to investors and lenders. Failure to comply with some of these covenants may trigger a default. Penalties that may result from a default include an increase in interest rates, an acceleration of the debt, or cross defaults to other debt.