Monday, June 04, 2007

Bond Costs Add Millions To County Financial Stress

Recently, we received information from a staff member of the Shelby County Finance Department about the costs of the county’s bond transactions, including new bond issues, bond refunding and swaps.

The information was not annotated, so we’re not sure what conclusion we are supposed to reach from it, but as I read them, the words of my stepfather rang in my ears:

“Why does government pay so much to people who don’t actually create a product? They don’t make anything – not food, clothing, convenience or something we can actually hold in our hands. They move paper and more paper and created a process where they are indispensable, all to justify their ridiculous fees.”
Rows And Rows

While our view isn’t necessarily that pessimistic, it is impossible to read the rows and rows of fees charged in connection with bonds and not wonder what’s actually done to earn them.

It’s also easy to see why these advisors and consultants consider contributions to political campaigns to be absolutely imperative, whether it’s federal, state, county or city governments. With the kinds of payments being made to these firms, they certainly can afford it.

We don’t intend to pick on county government. It just happens that it’s the government for which we were sent information, and it’s had a period of active bond transactions.

Bad News/Good News

That’s the bad news. The good news is that the Wharton Administration put an end to the partying in the Big Apple that was innocently called “bond signing trips” and attended by almost 20 people on some occasions.

They reached such a level of extravagance that the FBI investigated the expenses, particularly for private charges for family members of elected officials paid by county government, charges that ranged from private hotel rooms for various family members to private limos for wives shopping at New Jersey malls and from nightly Broadway plays to dining in New York’s finest restaurants for officials – elected and appointed- and their spouses and even their children.

It’s no wonder that invitations from the mayor and the board of commissioners’ chairman were treated as highly as papal dispensation. In the end, federal investigators were disappointed that the statue of limitation had run out on the most egregious bond trips, but they were openly pleased when the Wharton Administration ended the practice.

Party Down

In those years of costly bond closings, county elected officials were practiced at saying that the partying didn’t cost county government anything, because the bond companies were footing the bill. Left unsaid was the fact that the expenses were folded into the bond issuance costs that were billed to and paid by county government.

In fact, at one point, one key player in the bond issuance process cautioned the mayor’s office that expenses were “getting out of hand” and county officials were running the risk of attracting media attention. To keep the expenses out of the public record, the bills for the New York parties were buried in the records of bond firms, which were of course not open to the media.

At one point, The Commercial Appeal pursued the whispers within county government about the extravagant spending, but when reporters asked for records of the trips, they were told that they were paid by the bond companies. Of course, that was true. The expenses were actually paid by the bond companies. They just forwarded later to the county as part of the amorphous category, “bond issuance costs.”

Days Gone By

We emphasize that from all appearances, these days are long gone. Since taking control of the financial system, the Wharton Administration ended the junkets, instead sending a single finance officer to New York for the closing or actually having the closing in Memphis. After all, in this digital age, there’s no reason why everyone has to gather in New York any more to sign and exchange documents.

But back to the point of this post – the cost of bond transactions.

The packet sent to us included information about 24 transactions over a period of about three years.


The total amount of the fees paid to various consultants, bond companies, advisors and bond lawyers totaled $11,072,748.88.

The single largest amount was for the 2005 refinancing which cost $3.4 million in fees.

The Breakdown

Of the total of $11 million, the largest cumulative amounts went to the following:

• $2,431,383.40 – Morgan-Keegan, underwriting

• $1,386,972.60 – Edwards & Angell, the West Palm Beach law firm that has been county’s bond attorney for about two decades.

• $580,365.01 – Merrill Lynch, underwriting

• $570,085.00 – PFM, bond and financial advisors

• $446,660.12 – Goldman Sachs, underwriters advisor

• $423,805.00 – Community Capital, financial advisor

• $259,568.00 – Moody’s, rating agency

• $245,024.50 – Standard and Poor’s, rating agency

• $126,314.10 – J.P. Morgan, remarketing

• $187,000.00 – Fitch, rating agency

• $57,944.89 – First Tennessee Bank, financial advisor

Talk, Talk, Talk

Because it’s common practice for bond issuance expenses to be paid from the bond proceeds themselves, it ultimately means that the total amount paid by taxpayers over the life of the bonds – when interest is included - is roughly twice the actual amount of the feeds.

These days, CEO salaries are coming under closer scrutiny, and discussions include salary caps, tighter rules on corporate deductions and closer board oversight of executive pay. There’s also talk in Washington about toughening up the rules for Wall Street financiers.

This level of fees for county bonds is standard in the industry, but at the least, it would prove fascinating to see an explanation of what these firms precisely do for their money.

My stepfather's voice, in my head, has never sounded louder.


Anonymous said...

Interesting. Morgan-Keegan is the underwriter and top fee-getter for the City's bonds. Has that long been the case? John Stokes of M-K was a key organizer and the Chairman of the RDC for five or so years, and is still Vice Chairman. Since the RDC's proposals [would] have been among the largest bond-financed City projects ever, wouldn't you consider this to be an apparent conflict of interest?

Isn't that the broader problem with this City? All of the conflicts of interest, I mean? Especially it seems when it comes to development projects. Seems to me that subject would be worth a blog post or two from you -- if you haven't already discussed it.

Here is an interesting John Branston article on the subject from ten years ago: Small World: The Downtown Daisy Chain ... Or Zero Degrees of Separation. The article could have been written yesterday.

Smart City Consulting said...

Anonymous: We don't have information about the city's bonds. This is for county government's bonds only.

Anonymous said...

Oh. Sorry about my mistake. I'm sure Morgan-Keegan doesn't do any business with the City.

But I still think that Memphis should be called "Conflict City," for more reasons than one. Take attorneys for example. Just try to find one who can help you sue the City, say in a FOIA request. All of them do or have done business with the City.

If the City Charter Commission does anything, the first thing they should recommend is an intensive overhaul of the ethics rules.

BTW, I've just been tipped that the "takedown" on bond issues was 5x higher in the good old days.