Tennessee Board Strengthens Oversight of Local Debt, Scrutinizes Advisory Fees
The Tennessee State Funding Board (TSFB) recently implemented significant changes aimed at bolstering financial transparency and accountability within the state’s local government debt landscape. These revisions, driven by legislation passed earlier this year, expand reporting requirements and refine guidelines for debt issuance, while also raising questions about the cost of municipal advisory services.
Expanded Reporting Requirements for Public Entities
To enhance fiscal duty, the TSFB now mandates that all public entities, including industrial advancement boards, disclose instances of debt defaults, covenant breaches, and credit rating downgrades. this broadened reporting scope ensures the board has a comprehensive view of potential financial risks across the state. According to a 2023 report by the National League of Cities, municipal debt totaled over $786 billion nationwide, highlighting the importance of proactive monitoring.
The updated state debt manual, effective July 1st, provides clearer guidance for local governments seeking approval for emergency financing. A key stipulation remains that a legally adopted budget must be in place before incurring debt, unless the State Comptroller’s office formally certifies the need for emergency funds. This safeguard prevents impulsive borrowing and promotes sound financial planning.
New Financial Health Metrics and Revenue Anticipation Note Guidance
Recognizing the unique financial situations of certain municipalities, the board introduced a new financial health metric specifically for those that do not rely on property taxes. This acknowledges that traditional financial assessments may not fully capture the vulnerabilities of these communities. Similarly, new guidance was established for utility systems operated by local governments, addressing their specific financial characteristics.
The TSFB also clarified procedures for revenue anticipation notes (RANs), short-term borrowing tools used to manage cash flow gaps. This guidance aims to ensure RANs are utilized responsibly and do not contribute to long-term debt burdens. RANs have become increasingly popular, with issuance jumping 35% in 2022 according to data from Bond Buyer, making clear guidelines essential.
Fee Scrutiny: Questioning Municipal Advisory Costs
A point of contention arose during the meeting concerning fees proposed by Kidwell & Co., a municipal advisor working with the Ocoee Utility District. The firm proposed $987,000 in fees related to a series of bond offerings totaling $119.5 million for water and wastewater infrastructure improvements – a USDA water and wastewater revenue bond anticipation note up to $37.5 million, USDA water and wastewater revenue bonds up to $37.5 million and water and wastewater revenue advancement bonds up to $25 million.
Tennessee Comptroller Jason Mumpower expressed concern that these fees appeared disproportionately high, stating his team typically observes municipal advisors charging less than $10,000 for similar USDA-backed projects due to their relative simplicity.He characterized the proposed amount as a potential record for issuance costs on a project of this scale.
Larry Kidwell, President of Kidwell & Co., defended the firm’s pricing, emphasizing the value his company delivers through securing favorable interest rates for clients, ultimately saving them money over the life of the bonds. He argued that focusing solely on the firm’s fees overlooks the broader financial benefits achieved.
Further Investigation and Deferred Decision
The board, acknowledging the meaning of the concerns raised, voted to postpone a decision on the bond offerings until its July meeting. They directed staff to conduct a thorough investigation into the proposed fees and provide a comprehensive report outlining their findings. This action underscores the TSFB’s commitment to ensuring that local governments receive cost-effective and transparent financial advisory services. The outcome of this investigation could set a precedent for future municipal bond issuances across Tennessee.