With the sky falling on Wall Street, local governments are finding it harder to finance large building projects and simply make the bills while waiting for property tax revenues to start coming in.
Cities, counties and states all use municipal bonds to finance projects and general operations, but lately the $2.66 trillion national market has been frozen with little trading and higher interest rates, since Lehman Brothers filed for bankruptcy in mid-September, following heavy losses in mortgage-backed bonds.
Both Murfreesboro and Rutherford County use municipal bonds, but they use different strategies for acquiring the debt.
Murfreesboro uses the Tennessee Municipal League Bond Fund at a variable interest rate, while the county chooses to lock in for the long term with fixed rate municipal bonds.
“The city uses the TML bond fund for its capital projects this has resulted in literally millions of dollars in savings due to the lower interest rate and its function as a line of credit,” Deputy City Manager Rob Lyons said in a previous interview. “This means the city is only paying interest on money actually borrowed versus a bond issue where all the money is issued on day one even though the money isn’t needed on day one.”
But the downside is the variable interest rate is affected by swings in the national bond market, which tends to scare most county commissioners who remember the days of 10 percent interest or more in the late 1970s and early 1980s, County Finance Director Lisa Nolen said.
The turmoil in the bond markets caused variable rate bonds to approach 10 percent for a few days last month with Tennessee Municipal Bond Fund charging 9 percent interest, TMBF Chief Executive Officer Charles “Bones” Seiver explained, adding it has since dropped back down to around 2.5 percent.
But overall the bond fund is doing well, because it’s actually a pool of money that Tennessee cities and counties can pull from when they need extra cash.
“It’s not having an effect on us …” Seivers said. “It’s still the best show on the road for cities and counties in the state of Tennessee.”
Even with the three days of 9 percent interest in September, the TML Bond Fund still averaged 4.5 percent over the month, which is about what the county pays for fixed-rate, 20-year municipal bonds.
Overall TML variable rate bonds have averaged around 3 percent since 2000, Seivers said, adding Murfreesboro has saved between $32 million and $33 million in interest since it started borrowing in the early 1990s.
The county on the other hand will go to the bond market in late October or early November looking for a buyer for up to $85 million in municipal bonds to build two new middle schools and finish construction on Browns Chapel Elementary School.
It’s doubtful the county will actually borrow the full amount, and the amount will likely fall closer to $44 million.
“Unless things have changed in the past week, fixed rate is not the way to go,” Seivers said, noting fixed rate bonds aren’t selling the way they used to.
In anticipation for the tightened bond market, Nolen asked the Budget Committee to transfer $15 million from the rainy day fund to be used in case the bond market stays frozen.
But the federal government may still step in with states like California and Massachusetts lobbying for a bailout in the bond market, which could possibly make it easier for governments to borrow.
Michelle Willard can be contacted at 615-869-0816 or mwillard@murfreesboropost.com.
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