For six months, the battle over cityhood for Eagle’s Landing has been mostly about the dividing lines of black or white, Democrat or Republican, and rich or poor.
But experts say when one of the nation’s biggest municipal bondholders entered the fray last week with a federal lawsuit to stop the Nov. 6 cityhood vote, it become about something that could fundamentally end the dispute: money.
Capital One Public Funding is suing the state of Georgia and Henry County because it argues that creating Eagle’s Landing by de-annexing as much as half of Stockbridge does not address how millions of dollars in bonds owed by Stockbridge would be apportioned to the new city.
In other words, Capital One wants its money and fears that a weakened Stockbridge could default.
“It’s a very potent lawsuit that could actually derail the idea of de-annexations to create new cities,” said David Shock, a political science professor at Kennesaw State University. “You’re materially changing the contract behind the taxing mechanisms guaranteeing the security of the bonds.”
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And unlike others who oppose cityhood, Capital One has the deep pockets to get what it wants, economists and political science experts said. If the federal courts do not intervene and strip the vote from the ballot, the bondholder can continue with more legal action, dispatch a cadre of lobbyists to change the law in the next legislative session and possibly hike interest rates for future bonds by Georgia cities floating bonds, economists and political science experts said.
“This is not an unsolvable problem,” said University of Georgia economist Jeff Humphreys. “Just because the language wasn’t in there before, it doesn’t mean it can’t be. Maybe the courts can help solve it.”
There were warnings that Wall Street would react negatively to the law. Weeks after Gov. Nathan Deal’s early May signing of the bills that allowed Stockbridge to be de-annexed and Henry County to put cityhood on the November ballot, credit rating agencies Moody’s and S&P Global Ratings issued warnings that the state’s credit score could be affected if the apportionment issue was not solved.
“Our IF profile could weaken for cities based on our views of weakened predictability and, potentially, system support should similar actions become more frequent without considerations for overall operations and liabilities,” the agency wrote in May.
That could increase the burden on cities across the state to prove in future bond discussions that there is not dissension in their communities and that they won’t be susceptible to a succession.
Bond rating threatened
The credit analysts at Moody’s and S&P and Fitch, the credit agencies, are going to kind of assess that,” said Bart Hildreth, a bond expert at Georgia State University. “For example, if Atlanta wants to borrow, they really have to quiz the city. ‘Is Buckhead really mad at you. Do you know of any meetings going on.’”
That has a lot of municipalities worried, the experts said, because no one knows who will be next. Will Buckhead want to break free of Atlanta? Will Lake Spivey, a community of upscale homes in Clayton County, want to form its own government by taking the parts of Jonesboro that it desires?
The Georgia Municipal Association launched a task force this summer to look at the fiscal implications of the law, including outstanding indebtedness, bond obligations, and financial ratings, spokeswoman Amy Henderson said. Recommendations on their findings could come as early as next month.
In the meantime, experts said they are closely watching what happens with Capital One. If it pushes the state to clarify the law to satisfy Wall Street, Georgia can continue to enjoy its AAA bond rating.
“I don’t think we want to get the reputation of allowing goverments to walk away from debt,” said Katherine Willoughby, professor of public adminstration and policy at UGA.
If not, we may be looking at some tough decisions ahead.
“The questions is what will future investors do,” Hildreth said. “Institutional investors who buy millions of bonds, are risk averse. If they have a Georgia bond in their portfolio for diversification, they will buy either a state or Georgia bond, a county bond or maybe a school district bond … as opposed to a general obligation bond for a city that might face this kind of de-annexation.”