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The nations jewels… Wendy Pitts Reeves of Blount County, Tennessee

 

Wendy Pitts Reeves

About Me

As your voice for Seat C of District 4 on the Blount County Commission, I am committed to hearing what you have to say, and to keeping you informed about your local government. These are just ideas. I don’t speak for anyone else, and am not responsible for the opinions that you may voice here. Nevertheless, I believe strongly in your right to be heard. Check often for updates on local issues, upcoming events, and a chance to weigh in with your own ideas.

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Hello everyone,

Today, I’m providing a list of links to news articles that offer some perspective on the use of derivatives or ‘swaps’ as a financing tool in local government. Some of this will be a repeat; some of it you’ve probably seen yourself if you follow this issue. Nonetheless, gathering a collection of viewpoints can help as we try to get a handle on the big picture.     

In other words, I know what I’ve heard here at home, but what’s happening out there, beyond the borders of Blount County? Here’s a sampling of the news over the past few months.

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A. 2-16-09 New York Times: A Nationwide Inquiry on Bids for Municipal Bond

“In the last few years, the use of such derivatives in combination with municipal bonds has grown rapidly, market participants say. And so, it appears, has the interest of federal agents.”

“Even in places where the bonds and derivatives are performing as expected, irate government officials are finding they may have overpaid for various services and have inadvertently broken federal tax rules. Again and again, proceeds from tax-exempt bonds appear to have improperly generated investment income for banks and insurers.”

B. 3-24-09 Wall Street Journal: Alabama County Urged to File for Bankruptcy

“The county, which encompasses and surrounds Birmingham, Ala., and is home to about 660,000 residents, was one of the first casualties of the financial crisis, as a series of derivative contracts, known as interest-rate swaps, backfired in late 2007. “

C. 4-6-09 The Bond Trader: VRDN’s May Not Be Viable- Bernanke 

“WASHINGTON – The stresses in the short-term municipal market, fueled in part by a mismatch in supply and demand for liquidity facilities, may reflect that variable-rate demand notes are not a viable financing mechanism for states and localities going forward, Federal Reserve chairman Ben Bernanke warned lawmakers last week, surprising some market participants.”

“Many municipalities reportedly cannot refinance out of their bank bonds into fixed-rate debt because VRDNs are often paired with interest-rate swaps that would be quite costly to unwind because many of the swaps are now underwater,” Bernanke wrote. “In addition, the swaps typically require that the municipality post collateral.”

D. 4-7-09 New York Times: Municipal Bonds May Face Downgrade

Moody’s Investors Service assigned a negative outlook to the creditworthiness of all local governments in the United States, the agency said Tuesday, the first time it had ever issued such a blanket report on municipalities. “

“In a special report made public on Tuesday, the agency cited revenues that are falling almost everywhere as a result of the economic downturn. But it also discussed the problems some municipalities had created for themselves by using complex financial products that seemed to be saving money at first, only to send costs soaring during the credit crisis.”

E. 4-8-09 New York Times: Firm Acted As Tutor As It Sold Risky Deals to Towns

“In January, local officials were shocked to discover that annual interest payments on the bond had quadrupled to $1 million. Morgan Keegan, they said, did not serve them well in any of its roles.”

“In Mount Juliet, a suburb east of Nashville, city leaders were surprised to discover that the payments on its bonds had increased by500 percent to $478,000. Morgan Keegan offered to refinance the bonds, but the city hired a new financial adviser and another investment bank. “We decided we needed advice from someone who was not trying to sell us something,” Mayor Linda Elam said.”

F. 4-9-09 The Daily Times: County Benefits From Controversial Financial Instrument

(Note the difference in tone in this headline.)

“Currently, Blount County currently has $93 million in bonds associated with interest rate swaps. It has about $63 million in fixed rate bonds and $55 million in variable rate bonds.” 

“The county has the right to terminate (unwind, in financial jargon) the agreements — for a price. Depending on the state of the market, the county could either pay or be paid to terminate the agreement. Currently, the county would end up paying termination fees that range from $500,000 to $4 million per agreement. “

G. 4-9-09 Knoxville News Sentinel: Complex Bond Deals Haunt Cities, Counties

“Complex bond deals that city and county officials across Tennessee thought would lower their interest payments have come back to bite some governments with skyrocketing fees and little time to pay off the debt.”

“The derivatives used by local governments statewide were intended to lower interest rates, but worldwide credit market problems have instead caused some rates to skyrocket while shortening the deadline for paying off the debt. It’s similar to a homeowner dealing with interest that shot up on an adjustable rate mortgage and a balloon payment now due.”

H. 4-12-09 Cleveland (TN) Daily Banner: Rowland Concurs with Governor’s Stance on Advisers

“For some time now, three members of the Cleveland City Council and I have voiced concern about the city’s financial adviser Morgan Keagan & Associates, and what we thought was a conflict of interest allowing them to serve as our advisor and then selling the end product to us.”

“Over the past 15 months, all eight of the AAA municipal bond insurance companies have received credit rating downgrades from the rating agencies. These unprecedented rating downgrades have caused the interest rates on the bonds these companies insure to increase.”

I. 4-28-09 Reuters: SEC to Weigh Tougher Muni Oversight Soon

“WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission will begin weighing tougher oversight of the municipal bond market this summer and may seek authority from Congress to regulate the market more closely, the SEC’s chief said on Tuesday.”

“Calling municipal bonds critically important to the country and the economy, Schapiro said that “some of the enforcement things we have seen have been really appalling and really suggested for us to look at whether the regulatory umbrella that is there is sufficient.”

J. 4-30-09 (Memphis) Commercial Appeal: J. Wilson, Meltdown Shows Need for State Level Reform

(Note: This guest column by our new Comptroller outlines his thoughts about the need for reform, which he then shared at the State Funding Board meeting on Friday. I’d planned to attend that meeting, but had to miss due to scheduling conflicts.)

“The near collapse of the world’s financial system during the last year did not leave the cities and counties of Tennessee unscathed.”

“Something totally unexpected went wrong last year; the entire financial structure of the world economy came close to collapse. Interest rates spiked, the liquidity providers and insurers lost their credit ratings, the bond market froze, liquidity dried up. Many Tennessee cities and counties wound up paying substantially more for the money they borrowed.”

K. 5-2-09 The Tennessean: Tennessee Comptroller Seeks State Bond Changes

“Tennessee Comptroller Justin Wilson laid out a reform plan for the state’s local government bond market, calling for more disclosure and possible restrictions on the use of complex transactions and variable rate debt.”

“He specifically mentioned complex variable rate debt, and accompanying interest swaps and derivatives. He also pointed to the need for independent financial advice before governments get involved in complex bond deals. Wilson made his comments Friday to the State Funding Board.”

L. 5-2-09 The Daily Times: State May Bar Most Interest Rate Swaps

“I’d have to review that and basically see how it affects us,” County Finance Director Dave Bennett said. “If it sets a limit of $50 million at the minimum, none of ours are that high. We’ve got a $39 million, two $20 millions, a $14 million and a $10 million.”

You’re going to have to prove you understand you know what you’re going into,” Bennett said. “People need to understand the bond issuances they are getting into before they get into it. In my opinion, that’s not a bad thing at all.”

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Although I may not always agree with Mr. Bennett’s philosophies of debt management, I wholeheartedly agree with that last statement.

I support and applaud Comptroller Wilson on his willingness to look at this issue head on. I also appreciate the fact that he’s interested in citizen input. Until June 1, we may provide our thoughts on revising state guidelines as explained here on the Comptroller’s website. I intend to submit a statement, but would like to hear your thoughts and opinions first. So, what do you think? How can we make this better- both for Blount County and for Tennessee?

Until next time, 
~Wendy

 

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