Marietta: Bonds raise debt — and questions

By Larry Wills

The city of Marietta has turned into a Tale of Two Bonds. One is a $25 million general obligation bond for parks and recreation and the second is a $34 million revenue bond that is magically being transformed from debt for the city’s Downtown Marietta Development Authority’s (DMDA) hotel bond, into debt for city-wide capital improvements.

The parks and recreation bond on the Nov. 3 ballot has drawn opposition because it will add $25 million to the household debt of Marietta residents when they are struggling with the recession. A citizen’s group is campaigning for its passage.

The hotel/capital improvements bond came about because of a gamble city officials made based upon the advice of the city’s financial consultant, Morgan Keegan. Whether or not the City Council fully understood the risks involved is not clear.

Until recently, the tax-exempt municipal bond was considered a safe way to raise money. If a city wanted to build a park, officials issued a fixed-rate bond and repaid investors over decades. In the 1970s, large urban areas began using variable-rate bonds as a way to save money.

The variable-rate bonds and a derivative, interest rate swaps, were peddled as a way to avoid raising taxes. When created, it was believed that small governments, without the knowledge and experience to understand their risks, would never adopt them. But they did, and the result was a suit filed by the Securities and Exchange Commission in July against Morgan Keegan.

It blames this company for the financial woes suffered by a number of small Tennessee towns resulting from complex municipal bond instruments sold to them.

Morgan Keegan also brought the concept of variable rate SWAP agreements to Marietta. The SWAP “protection” was entered into to fix the hotel bond rates to an average of 5.5-6.0 percent with the notion that the revenues from the hotel would cover the city’s debt service of the bonds. The interest rate SWAP agreements were effective until December 2007, when interest rates started falling from 5.3 percent to a .027 percent low in August 2009. In 2008, the city was advised the bonds could no longer be sold at prices at or below the rate fixed by the SWAP agreements.

As a result, the city was faced with paying more principal and interest on the DMDA bonds than designated revenues generated. To stop the bleeding, the city started buying back the bonds, effectively paying the higher interest to itself and becoming both the bond debtor and the bond investor. All but $300,000 of the original issue of $30 million in bonds is now an asset and a liability on the city’s balance sheet.

The public and most City Council members were kept in the dark until a complicated plan was hatched to reissue the bonds under the heading of capital improvements that depended upon the credit and revenue generation of the Marietta Board of Lights and Water.

City Council members wisely established an advisory committee to do what city administrators should have done — issue a position paper explaining it all. The primary recommendation of the committee’s excellent report is to hire outside, independent experts to evaluate Morgan Keegan’s proposed re-financing plan. Stay tuned.

Larry Wills lives in Marietta.