The state funding board accepted at its meeting Wednesday a series of guidelines from Comptroller Justin Wilson aimed at ensuring local governments who enter into complicated bond deals understand the possible repercussions.
Wilson’s guidelines, which still require board approval before they are enacted, also seek to provide transparency so the public can track the details of municipal bond swap agreements.
The guidelines were first introduced in May and have received public comments from local government officials and powerful financial institutions from across the state.
“The proposed guidelines I present to you today are designed to assure that any governmental entity that enters into these types of transactions does so only after making informed decisions on information that is also made available to its taxpayers,” Wilson said to the board.
The new guidelines were introduced after a New York Times story in April showed that some Tennessee municipalities were receiving their financial advice from the same firm underwriting the complicated swap agreement transactions. The firm was Morgan Keegan, which was sued by the SEC last month for misleading investors, including Tennessee municipalities.
Wilson’s guidelines also call for the delineation of responsibilities so that financial advisers are truly independent and are not also underwriting deals for local municipalities.
Many small town and county governments are run by part-time officials with day jobs, who lack the financial expertise to navigate the municipal bond industry. County governments hire financial advisers, who provide advice on issues like the issuance of debt to pay for capital projects including building roads and schools.
But in the last 20 years, Morgan Keegan and its cross-state rival the Tennessee Municipal Bond Fund recommended complicated deals called swap agreements or variable rate bonds, which carried considerable risk.
When the worldwide financial markets tumbled last year, many of the insurance agents and banks, which were guaranteeing the bond deals, had their ratings downgraded by national rating agencies. That turned the swap agreement bonds into bank bonds and gave local governments inflated payments, which strained budgets. The city of Mt. Juliet, for instance, had nearly $7 million in bonds called in by JP Morgan. The bank bond payment was $150,000 per quarter, which was a costly expense for a city government with an operating budget of $11 million.
Wilson said he looked forward to receiving more public comments and added that the guidelines were still amendable before they were approved by the funding board. No date has been set for the next funding board meeting.