Debt Ceiling Debate Hits Home

Amile Wilson

Jackson Mayor Harvey Johnson Jr. said that the council's decision to refinance its bond debt will help stave off water and sewer bill hikes.

by Lacey McLaughlin
July 20, 2011

Jackson City Councilwoman Margaret Barrett-Simon expressed concern this week over what Congress' debt ceiling debate will mean for the council's decision to restructure its bond debt.

Congress is currently debating whether to raise the U.S. debt limit by Aug. 2. President Barack Obama said that if Congress does not raise the current $14.29 trillion debt ceiling, the government would ultimately have to default on its debts.
   
"With the current situation in Washington, there is a lot we don't know about what the impact will be on the bond market as well as ratings," Barrett-Simon said.
   
The Wall Street Journal reported yesterday that Moody's put the country's credit on negative review last week, citing an increasing likelihood that Congress will not raise the debt limit by the deadline.
   
The city hired financial adviser Porter Bingham of Malachi Financial Group to help execute the bond restructuring deal. Bingham said that the city could back out of the deal before the bonds are sold, if the market changes drastically and takes a turn for the worst. He estimated a two- to three-week time period for selling the bonds.
   
"The credit rating will be driven by what's taking place in the broader market if the U.S. credit rating is cut, and subsequently it appears to trickle down to municipalities," Bingham said. "I think the timing is now, and that's one good reason why I think we should do this."
   
The restructuring plan the council passed Monday excuses the city from original payments on its 2002, 2004 and 2005 water and sewer bonds for the next two years. The transaction will lower the city's interest rate from 5.05 percent to 4.30 percent, but extend the life of the 2004 and 2005 bonds two additional years to 2034. While it ultimately adds about $3.8 million in debt service after refinancing, it allows the city to realize short-term savings of $3.3 million this fiscal year and $3.3 million in fiscal year 2012.
   
The city's debt-service ratio requires it to maintain $1.20 in its water and sewer fund for every $1 it has in bond debt service. If the city violates the debt-service ratio, it could potentially prevent the city from obtaining bonds in the future.
   
State Rep. Cecil Brown, D-Jackson, an investment adviser at Medley & Brown LLC, said if Congress defaults on its debt, it would have negative consequences for municipal bonds.
   
"If the U.S. government got down to Aug. 2 and said 'we aren't going to pay our debts' that would be very bad for the bond market and bond holders," Brown said.
   
He likened the city's debt restructuring to refinancing a home: As along as interest rates are fixed, it can be a viable move for the city. Bingham said that the city's rate of 4.30 percent is fixed and would only change if the city chooses to refinance its debt again in the future.
   
Council members spent more than an hour asking Bingham and bond attorney Steve Edds questions about potential risks the deal would have on the city's financial future. In the end, the council voted unanimously to approve the deal, with Ward 3 Councilman Kenneth Stokes absent.
   
The restructuring also takes pressure off the city to increase resident's water or sewer bills.
   
"This is not a guarantee that we won't have a rate increase, but they don't have to be as drastic as they would if we had not done the deal," Jackson Mayor Harvey Johnson Jr. said. "It would have put our infrastructures repairs on hold and potentially put us in violation of our own ordinance that requires us to have 120 percent coverage on our debt.

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