Tennessee leads states in monitoring of local government debt management

Tennessee recently increased state oversight of local government debt transactions, and the economic crisis is likely to force other states to make the same decision. A risky deal by Lewisburg, Tenn., got the city in trouble. Lewisburg has a population of just over 11,000 and unemployment over 10 percent. City officials were stunned when they learned that their interest payments on a derivative municipal bond issued for a water and sewage project had quadrupled, from $250,000 to $1 million. The crisis in Lewisburg led state treasurer Justin Wilson to conclude he "had no choice but to increase the state’s oversight of local government debt transactions to protect Tennesseans from getting socked by sudden increases in borrowing costs," Stephen C. Fehr of Stateline reports. Last month Wilson developed a model debt management policy for local governments.

"When our government officials make mistakes, they are usually doing so with our tax dollars," Wilson told Fehr. "We are entitled to have governments set basic, common-sense guidelines so we can know what happens to our money." Other states like Alabama, which has tried for two years to restructure Jefferson County’s $3.2 billion sewer debt, and Pennsylvania, which agreed in September to bailout Harrisburg preventing the city from defaulting on bonds used to finance a trash incinerator project, may soon be forced to make decisions similar to Tennessee.

"Troubled cities in California, Indiana, Michigan and Rhode Island also are having difficulty paying their bills, drawing the attention of state officials in varying degrees," Fehr writes. "Those cities are suffering more from a combination of falling tax revenues and rising public pension costs than from risky bond deals." Michigan rejected a request from Hamtramck to file for bankruptcy, while Indiana lawmakers are considering legislation that would allow local governments to file for bankruptcy.

Wilson's model local government debt policy suggests "policy makers should clearly understand debt transactions, citizens should be able to get clear explanations about transactions, the parties involved in debt transactions should avoid conflicts of interest and the costs and risks associated with transactions should be clearly disclosed." Local governments objected to the proposal, calling Wilson heavy handed. But Wilson says he now has their support after some revisions.  "We’re not in a position of telling them what they can and cannot do," he told Fehr. "There’s very little that’s prescriptive in the guidelines." (Read more)