Business as usual?

Another season of Town Council meetings begins tonight at 7, and it already looks like déjà vu all over again. Over the summer some council members seem to have gotten in touch with their inner sneak. Like students returning from summer break, they are trying to see how much they can get past the teacher by presenting a Consent Agenda chock-full of debatable items.

The most egregious item is number 4, which approves the use of Build America Bonds and appoints a financial adviser for the next town bond issue. The Richmond-based Davenport & Company LLC has apparently convinced the town that using taxable BABs could save the town as much as $800,000 in interest expense over the 20-year life of the bonds.

Hold on there — BABs carry some risk. They are part of the American Recovery and Reinvestment Act, and they offer state and local issuers a 35 percent subsidy on interest costs when bonds are sold on a taxable basis. The financing of the bonds is cheaper than borrowing in the traditional tax-exempt market, but here’s where the risks come in — if the U.S. Treasury decided to reduce the BAB subsidies by any amount issuers owe the government, which it can do at any time, municipalities would be forced to come up with the cash to repay debt service.

The threat of that happening is so real that the State of Florida has suspended BAB sales until the government guarantees the subsidy. The BABs are supposed to save governments money, not add to budget shortfalls.

After the folks at Davenport & Company told the town about the $800,000 in interest expense that could be saved – assuming that the subsidy were not recalled – the company must have mentioned that the recall is a possibility. According to a memorandum, the town staff believes “the potential risks” in issuing BABs “are manageable and do not outweigh the potential savings.” Oh, and did I mention that Davenport also nabbed the appointment as the financial adviser for the transaction? Hmmm.

Seems to me all of that is worthy of discussion. The company that’s recommending the town do this has a financial stake in the matter. Stashing such an item in the Consent Agenda without allowing for that discussion is as deceptive as the council trying to pass insurance for its members without public debate.

This council seems bound and determined to pile risk upon risk with this bond issue. To make matters worse, some council members also want to sneak elements of that risk past the public. That is the same deceptive tactics that they got caught with last time. What ever happened to honesty and public debate among town caretakers when dealing with public trust?
–Don Evans

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  1. Ed Harrison

     /  September 15, 2010

    As a Council member, I play no part in putting together the Consent Agenda for a business meeting. As with every local government which has one, the manager is the major actor on that, with consultation with mayor or board chair. Some past mayors have been assertive about placing items on that Agenda. In some cases, a Consent Agenda is a response to a Council action or a request from a particular Council member. Any member can pull an item of his/her own volition or at a citizen’s request. It isn’t clear if you want this one pulled, or if you just want to blog about it. The Council will get an email sometime in the next couple of hours asking if anyone wants to pull a Consent Agenda item, so that relevant staff can be notified that they might have to stay at the meeting for a while. For example, I will be pulling the item on the NC 54 corridor study, which I proposed for Chapel Hill participation more than three years ago. I also hope to discuss the item ahead of time with the lead staff on it.
    An email to the Mayor and Council right now can result in item (5) getting pulled for questions and discussion. You would get to speak on it, in “real time,” as we call it now. Always worth a try.

  2. Ed Harrison

     /  September 15, 2010

    As a quick follow up to the last comment, the item you discuss has just been pulled for public comment (if there is any) and Council discussion.

  3. Thank you Ed. Given that the staff memo omitted mentioning some of the known risks (even if they think minor), the potential heavy fiscal downside, the use of a new type of financing and the purpose its being put to, this item deserved some discussion.

    I would hope that Council asks staff for more detail and a presentation of a fuller range of possibilities. What happens if the subsidy is pulled? Pulled next year or 5 years from now? What happens if the rebate is withheld? If the Town ends up absorbing an extra cost, is the plan to scramble and find the money in the GO funds or to pull from the “allowed” debt?

    I appreciate Don’s highlighting of the potential that the consultancy is giving self-serving advice. Is there a concern there?

    Finally, while the consent agenda is usually formed outside of the whole of the Council’s direction, the Mayor and Manager do know that there has been concern by both the public and their colleagues that items of potential major fiscal or policy portent have been buried in it. You know that I’ve asked Council to pull a range of such items throughout the years to improve transparency (remember the health insurance issue?).

    Interestingly enough, the Council is discussing an ethics upgrade this evening that highlights transparency and public access. Yet, here’s an item that represents a number of potential downsides – including the nature of the advice – buried in it.

    Not sure if I’ll make the meeting but will be looking forward to Council’s review.

  4. Mark K. made the comment that the risks outlined above were mentioned in the material he has.

    That material is not part of the agenda item here:

  5. A shame the presentation made by Davenport wasn’t part of the agenda packet. Pretty good overview sans a bit of risk analysis.

    So far the best line is from Jim Ward “If this was your inheritance” your mother was going to leave you, would you choose BABs?

    A bit disappointing that Davenport references all or nothing for the subsidy. A more likely scenario is a stepwise reduction – as already outlined by the Congress – in the reimbursement rate which alters both the yield and interest curves.

  6. Whoops! Forgot to mention one of the best parts of Davenports review involved clearly underlining that the tax exempt bonds command a better than par (more than %100 on the dollar) rate of return. In the end, that means that the Town could raise $22M + on a $20.1M issuance. In other words, we make a type of “profit” – an original issuance premium.

    You could actually issue less than $20.1M in bonds to generate $20.1M for the bond projects. Why the $2M+? It essentially allows wiggle room – something that the Town has needed in the past (crazy expansion in the Town Ops Center costs, the slight (relative to the TOC and some other humdingers) increase in the Aquatics Center, etc.).

  7. Matt C. and Jim W. just spoke to the overage issue. Of course, if the interest trend lines follow Davenports analysis, if the Feds continue with the subsidy, etc. the OVERALL cost will be less going with a mix. The question is what is the likelihood of each scenario?

    The suggestion that BABs are inherently safe because if the Feds pull or decrease the subsidy “a whole lot hurt” throughout America occurs gives one pause. I wish Davenport had prepared an analysis showing potential reductions in the subsidy bounced against anticipated interest rate increases.