Municipal bond market freeze stings Nashville

Metro Finance Director Richard Riebeling says it's not time to panic, but it's also not the time to launch a massive capital spending plan. File

For about 20 years, the municipal bond market was smooth sailing through calm seas, as local governments were able to borrow at rates lower than any comparable market.

All that changed when the national credit market took a horrific turn weeks ago, prompting congress to consider a record $700 Wall Street bailout plan in order to stave off a possible recession, or worse.

One side effect of the nation’s economic crunch has been a virtual freeze on the municipal bond market, the vehicle through which local governments finance capital projects like building new schools and paving roads.

Nashville has already been impacted by the market freeze. The capital budget-spending plan, which under former Mayor Bill Purcell was typically passed around July, was supposed to be in front of Metro Council at the end of September. But Mayor Karl Dean was forced to delay the capital-spending plan indefinitely, at the suggestion of Metro Finance Director Richard Riebeling, because of the current economic climate.

Dean’s capital budget wish list includes commitments to downtown riverfront redevelopment, a new Metro Police DNA laboratory and funds to expand the city’s sidewalks and greenways.

Although no bond ordinance has been passed to green light those projects, Dean’s press secretary Janel Lacy said the mayor’s commitments were still there.

“Ultimately depending on what happens between now and then, the mayor is going to be fiscally prudent and only propose a plan the city can afford,” Lacy said.

In the meantime, there’s no telling when the municipal bond market will be up and running again or what it will look like once it is.

Riebeling said those in the bonding industry have never seen the market take a turn like this. It was a sentiment echoed by Thomas Doe, CEO of Municipal Market Advisors, who said the current crunch comes on the heels of unprecedented easy times.

“What’s unnerving is that the ease an issuer, like a city, had access to capital markets was probably the easiest and unprecedented in the history of finance,” Doe said. “Over the past 13 months, everything has changed and now it’s more as it was 15 to 20 years ago.”

In order for Metro to get back on track with capital projects, the municipal bond market must settle down. Central to that happening, according to Riebeling, is for U.S. congress to pass the proposed $700 billion bailout.

If and when that happens, it should be at least another three months before the entities resume purchasing municipal bonds.

“If we were trying to issue debt today, there would be some repercussions, but we’re many months away from trying to issue any debt,” Riebeling said. “I thought, and the mayor concurred, that the whole idea of going to Council with a big spending plan was probably imprudent until the market returns to somewhat of a normal level.”

Riebeling said he has consulted with bonding experts across the country and consensus is that the market will eventually iron itself out. But Riebeling said there is some disagreement whether municipal bonds will be as inexpensive as they were before crisis. Doe said some investors could view municipal bonds as a safer route than Wall Street, but his guess was that rates would rise as much as a full percentage point once the market returns.

That means more strain on a Metro budget, which asked every department but schools to make cuts during the last fiscal year. Riebeling said it was likely Metro would scale back capital spending moving forward.

Under Dean, fiscal conservatism has already been the administration’s policy. Last fiscal year, Metro had a $300 million capital budget passed by the previous Council and then-Mayor Bill Purcell.

But Dean instituted a freeze on all capital projects earlier this year and only about $120 million in projects ended up on the books. This fiscal year is already into its second quarter and no new capital projects have been approved.

“It means Metro has not put a lot of capital dollars into the city for the last [two years],” said District 23 Councilwoman Emily Evans, a former municipal bond underwriter for J.C. Bradford and Company. “By the time this clears up in three-to-six months, we’ll be on our way to fiscal year 2010, which means we are not going to be doing a lot of capital investment for two full years.”

The market crunch could affect Metro in other ways, although Riebeling cautioned that panic was unnecessary. Metro employees with their pension plans invested in the stock market are seeing their portfolios take a hit, which Riebeling said is to be expected in an unprecedented market decline.

But Riebeling said Metro was committed to replacing funds that could be lost when pension investments are reviewed next year.

“You have to look at those as three-year investments,” Riebeling said. “You can’t panic.”

Neither is there panic on Dean’s other prime initiatives for his second year in office – a new downtown Convention Center and water/sewer reform. The estimated price tag for the Music City Center is about $635 million, and those projects typically come in over budget. Convincing Council to approve the issuance of revenue bonds in this economic climate might be difficult, Riebeling conceded. However, he said the merits for building a new convention center remained even though the economy may lead to a national trend where businesses scale back or eliminate travel.

On water and sewer reform, a rate increase is likely for necessary infrastructure improvements.

“We can’t ignore our infrastructure,” Evans said.

And despite the current climate, Riebeling said Nashville had an advantage over other municipalities, which are looking at mid-year layoffs and the indefinite suspension of necessary projects.

“Good credits like we are will have access to the markets,” Riebeling said. “We’ve always had mayors and councils who were good stewards of the city’s budget. People want to do business with Nashville and they will continue to in the future.”