Municipalities get new regulations for 'exotic' financial transactions

Wednesday, October 21, 2009 at 12:13pm

State officials are touting a new set of rules aimed at preventing Tennessee cities and counties from blindly entering risky bond transactions and barring firms from serving as both financial adviser and underwriter in the deals.

The state Funding Board approved the changes Tuesday to govern cities and counties that propose to enter into interest rate swaps and other exotic financial transactions.

In April, state Comptroller Justin Wilson ordered a statewide freeze on such deals after the New York Times reported some Tennessee cities were among those around the country struggling to pay ballooning interest payments. Local officials say they were not told that interest rates could skyrocket if the economy went bad.

In Mt. Juliet, the payments on bonds increased by 500 percent to $478,000.

The law authorizing local governments to enter into deals with the approval of the Comptroller's office zipped through the legislature in 1999, and prominent leaders of both parties voted for it.

The law failed to take the precaution of prohibiting a single firm from serving as both financial adviser and underwriter. That's how Morgan Keegan and Bass, Berry & Sims, notably, were able to tutor Tennessee towns on the financial risks and benefits of these bonds, then make the deals and profit from them.

The funding board’s new rules are aimed at eliminating potential conflicts of interest by prohibiting individuals or companies from representing more than one side in the transactions, according to the Comptroller’s office.

In addition, cities and counties will have to demonstrate that they employ people with sufficient expertise to understand these complex transactions, including a chief financial officer and an accountant. Cities and counties must also meet minimum outstanding debt requirements and have an audit committee and a capital improvement plan.

“The goal here is not to prohibit cities and counties from entering into swaps, forward purchase agreements or similar transactions,” Wilson said. “Our goal is to make sure officials in these cities and counties really understand what they’re doing. And the taxpayers who live in these cities and counties should know what risks are being undertaken and what fees are being paid on their behalf.”

2 Comments on this post:

By: JeffF on 10/21/09 at 2:42

Bravo. Kudos to a surprising source (Justin Wilson). I was afraid that he would be a political hack but this was some wise, unbiased leadership.

By: govskeptic on 10/22/09 at 8:39

Hard to believe that large Tenn financials and hugh law firm would take advantage of unsuspecting city officials?
Hopefully these same laws apply to educating dense city councils having to deal with NY bond traders!