State Comptroller Justin Wilson’s Debt Management GoalsThe governing bodies understand what they’re doing.That people have the ability to find our what their government is doing.If there are conflicts, they are avoided or disclosed.Costs and fees and risk are completely disclosed.
Many people have had to decide when and how to spend $50, but few will ever decide when or how to pull the trigger on $5 million.
But city councils, county commissions and local utility boards regularly have to finance multimillion-dollar capital projects. Tennessee Comptroller Justin Wilson wants to make sure the state’s approximately 350 government entities fully understand and publicly disclose how they issue debt.
Beginning Jan. 1, any government body that wants to issue debt for things like schools, sewers or jails must have a debt management policy that meets minimum state requirements about transparency, professional conduct and conflicts.
“We want our cities and counties to be financially sound because we’re worried about the quality of life of the citizens of Tennessee,” Wilson said.
The Hamilton County Commission approved a new management policy Dec. 7. The new policy, which is three times longer than the county’s previous one, specifically states that the county will avoid the use of interest rate swaps, complex financial instruments that set Wilson’s statewide quest in motion in 2009.
Wilson took office in 2009, months before The New York Times exposed that officials in Lewisburg, Tenn., had seen debt payments quadruple on a bond for sewers. Officials told the paper they had been insufficiently advised about risky financial transactions called derivatives.
That story and other discoveries prompted Wilson to begin statewide changes.
“Local governments very often didn’t understand what they were doing,” Wilson said. “Secondly, it would be almost impossible or very difficult for citizens to understand what they’re doing and to judge the validity of the action. Conflicts of interest were rampant, every conceivable type of conflict of interest.”
Conflicts included financial advisers who also served as debt underwriters. Some also involved undisclosed relationships between lawyers, liquidity providers and trustees, Wilson said.
Some of the transactions just amounted to bad deals for local governments, he said.
Financial adviser Tom McAnulty, who recently worked with Rhea County to secure $33 million to build a new high school, said folks like him have a fiduciary duty to guard the best interests of the governments.
“Every four years when we have an election, about one-third of the county commission and county legislative bodies are replaced, and about one-third of mayors are replaced,” he said. “When they come in, they don’t understand government or government financing.”
Some towns and counties can’t afford to keep a full-time finance staff member.
Now the state also requires cities to have certified municipal finance officers and provides training to existing staff members.
“I’ve listened to municipal officials and mayors absolutely blow up at me about how terrible our requirement is, how expensive, how difficult,” Wilson said. “Then they send people through the training, which they all say is very rigorous and very difficult, and they’re very, very pleased with the process.”
The state’s Municipal Securities Rulemaking Board began on Nov. 27 restricting transactions involving a financial adviser also serving as underwriter.
In addition, beginning next year, bodies must create a debt management policy before they issue debt.
McAnulty said his firm, Stephens Inc., never engaged in derivatives.
But he said it does tailor debt packages to the individual municipality’s or county’s needs. A one-size-fits-all approach to debt structure would be too inflexible, he said.
He used the example of Rhea County, where the 22.5-year financing is structured so that principal payments on the new high school don’t begin until 2019, after a previously built school is paid off.
Wilson said he thinks the state’s requirements are reasonable and provide government entities flexibility.
Though he doesn’t expect to see copies of adopted policies by the end of the year, he said the state will require them before approving debt issued in the future.
“The policy itself says that they’re due by Dec. 31, but I’m not running around at this point with a gun or the badge,” Wilson said. “I expect that most of the municipalities will have it in by then, but we’re working with them. This whole process is novel to many communities.”