Mortgage crisis felt in city halls
The meltdown is raising rates on municipal bonds
It's already taking a toll on the economy. Now it's looking at your sewer systems, your water lines — even your plans to build a new police or fire station could be on the line. Suddenly, some of your city's most stable assets — municipal bonds — are being threatened by the barbs of someone else's greed. And that threat is going to cost you money.
"The bond market is part of the capital market that's been knocked around for a little while," said John Crandall, executive vice president for George K Baum Co., an investment banking firm that underwrites a majority of Utah's bonds. "The effect is our municipalities are paying more in interest rates because of actions of others and an unregulated mortgage market."
Cities, counties and states often use their financial worth to issue multimillion-dollar bonds — like taking out a loan against your house — that pay for big projects, such as building city halls, fire stations, and sewer and water systems. In the past, municipalities that didn't have top credit ratings, known as "AAA" ratings, paid bond insurance companies to represent them. That way, the municipality could still pay the lower interest rates normally reserved for highly rated entities and thus afford to go ahead with its intended project.
The sudden shift made cities with variable-rate bonds, like West Jordan, where interest rates on a Utah Water Finance Agency bond doubled in one month, start to panic and scramble to replace their bond with a private investor before it was too late.
"If it wasn't for the perfect storm of fiscal distress the national economy has experienced, we probably would have still been using those variable-rate notes," said David Hales, West Jordan finance director. "It's had an impact. Whether it has an impact in the future will depend on what bond rating we can get as a city and whether bond insurance is available."
Bond insurance is becoming harder for cities to come by. Five of the seven bond insurance companies Hales could have gone to in the past no longer have an AAA rating. Those companies fell when they tangled with insuring the subprime mortgage market.
"The thing about municipal bond insurance, like municipal bonds, is it's not fancy," Crandall said. "It's just not sexy. It's a basic return. You get a smaller return, but you can guarantee a return. They got big returns by insuring the subprime market. It was all greed."
Recent comments
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