OGC Opinion No. 03-10-11

The Office of General Counsel issued the following opinion on October 17, 2003, representing the position of the New York State Insurance Department.

Re: Special Revenue Bonds


May "Public Purpose Bonds" be considered substantially similar to Special Revenue Bonds as defined by N.Y. Ins. Law § 6901(r)?


Public Purpose Bonds may be considered substantially similar to Special Revenue Bonds as defined by N.Y. Ins. Law § 6901(r).


The inquirer is writing on behalf of an Association regarding the question of the treatment of privately issued bonds used for the financing of public purpose projects ("Public Purpose Bonds"), which are primarily located overseas. These projects include toll roads, bridges, airports, public transportation facilities and other types of infrastructure projects that arguably serve a substantial public purpose.

In the United States, projects of this nature are invariably financed through the issuance of tax-exempt bonds by special purpose, government sponsored tax-exempt entities. Overseas, however, the general absence of tax-advantaged financing, among other reasons, has led to the transfer of the operation of many such public purpose projects to the private sector. Generally, the private entities operate under a concession agreement with the sponsoring government agency, which maintains a level of regulatory oversight and control over the project.

The financed projects are of a public purpose nature as described above. The financing is structured so that the stream of income generated by the use of the project is sufficient to enable the amortization of the bonds.

It is the inquirer's contention that, even though the issuer of the bonds is not a governmental entity, Public Purpose Bonds should be accorded the same treatment under the New York Insurance law as "Special Revenue Bonds" on the basis of the facts that both types of bonds are used to fund projects of the same essentially public nature and that the amortization of both types of bonds is effected through the income stream generated by the projects financed. More specifically, the inquirer proposes that the following three criteria constitute the standards with which Public Purpose Bonds must comply in order to be considered to be substantially similar to Special Revenue Bonds:

  1. The obligations finance projects that serve a substantial public purpose;
  2. The project and/or the tolls, tariffs, usage fees, or similar other charges for use of the project is subject to regulation or oversight by a governmental entity, and
  3. The obligations are rated investment grade at the time of issuance of the financial guaranty policy by at least one nationally recognized rating agency before giving effect to the policy.


N. Y. Ins. Law § 6901 (McKinney 2000) sets forth the definition of financial guaranty insurance, as well as many of the terms relevant to that kind of insurance. Special Revenue Bonds are defined in N.Y. Ins. Law § 6901(r) as follows:

"Special revenue bond" means any security or other instrument, under which a payment obligation is created, issued by or on behalf of or payable or guaranteed by a governmental unit to finance a project serving a substantial public purpose, and not payable from any of the sources enumerated in subsection (p) of this section; or securities which are the functional equivalent of the foregoing issued by a not-for-profit corporation.

N.Y. Ins. Law § 6901(r) (McKinney 2000).

The term "governmental unit" is in turn defined by the statute as follows:

(k) "Governmental unit" means the United States of America, Canada, a member country of the organization of economic cooperation and development having a sovereign rating in one of the top two generic rating classifications by a securities rating agency acceptable to the superintendent, a state, territory or possession of the United States of America, the District of Columbia, a province of Canada, a municipality, or a political subdivision of any of the foregoing, or any public agency or instrumentality thereof.

N.Y. Ins. Law § 6901(k) (McKinney 2000).

N. Y. Ins. Law § 6904 (McKinney 2000) sets forth the limitations applicable to the area of financial guaranty insurance. In particular, it enumerates the only types of guaranties that may be written under the law. N. Y. Ins. Law § 6904(b) provides, in pertinent part, as follows:

(b) Permissible guaranties. (1) The superintendent shall not permit the writing of financial guaranty insurance except as defined in subparagraph (A) of paragraph one of subsection (a) of section six thousand nine hundred one of this article, and a corporation may insure the timely payment of United States dollar debt instruments, or other monetary obligations, only in the following categories:

(A) municipal obligation bonds;

(B) special revenue bonds;

(C) industrial development bonds;

(D) corporate obligations;

(E) partnership obligations;

(F) asset-backed securities, trust certificates and trust obligations other than mortgage-backed securities secured by first mortgages on real property... ;

(G) installment purchase agreements executed as a condition of sale;

(H) consumer debt obligations;

(I) utility first mortgage obligations; and

(J) any other debt instrument or financial obligation that the superintendent determines to be substantially similar to any of the foregoing or shall otherwise be approved by the superintendent.

N.Y. Ins. Law § 6904(b) (McKinney 2000).

The statute, at subparagraph (J), specifically empowers the Superintendent to determine that other obligations are substantially similar to the specifically enumerated types and accordingly allow such obligations to be insured by financial guaranty insurers. Furthermore, as indicated by the above definitions, "Special Revenue Bonds" do constitute a type of security for which financial guaranty insurance may be written.1  And although the issuer of Public Purpose Bonds would not satisfy the definition of a "governmental unit" under N.Y. Ins. Law § 6901(k), criteria number 3 set forth above (i.e., that the securities issued be investment grade) approximates that statute’s requirement that the issuer have a sovereign rating in one of the top two generic rating classifications.

In an earlier case, the Department concluded2 that bonds issued by a government-owned entity ("Issuer") in Canada that were used to raise funds to expand, maintain and operate a toll road in Canada were properly regarded as substantially similar to Special Revenue Bonds, even though the Issuer was purchased by a private entity which, acting as lessee, operated the toll road under the regulatory supervision of the provincial government. In that case, the revenues raised from tolls charged constituted the source of revenue for the repayment of the bonds. No analysis or quantification of the degree of regulatory supervision was made.

The scenario presented by the present inquiry differs somewhat in form from that addressed in the March, 1999 letter in that the issuer herein is in the first instance a private entity as opposed to a governmental entity that was subsequently acquired by a private entity. Nevertheless, in light of the fact that both the use of the proceeds of and the source of revenue for repayment of the Public Purpose Bonds are the same as in the case of Special Revenue Bonds, the flexibility granted under N.Y. Ins. Law § 6904(b)(1)(J) permits similar treatment be accorded to each. With a sufficient demonstration as to the degree and effectiveness of the "regulation and oversight" by the applicable governmental authority, Public Purpose Bonds that comply with the three criteria proposed in this inquiry to the Department3 should be regarded as "substantially similar" to Special Revenue Bonds for purposes of applying N.Y. Ins. Law § 6904(b)(1)(J).

For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.

1 This type of obligation is also subject to favorable aggregate risk and single risk limits under N.Y. Ins. Law § 6904(c) and (d) (McKinney 2000).

2 Letter from Supervising Examiner Paul De Robertis dated March 4, 1999 to Marcia Alazraki, Esq.

3 These criteria are set forth in the "Facts" section of this letter.