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article imageOp-Ed: Naïve bond market gets it all wrong again in Moberly, MO

By Paul Wallis     Jul 7, 2012 in Business
Sydney - Moberly, Missouri is a classic American small town. It’s a nice place, and it’s just been hit with $39 million debt by the bond market for a failed project. Moberly refused to pay, and is being penalized for it.
Who needs tornadoes, when you've got the bond market? The city is now in big trouble with the bond market for a situation over which it had no control. Its bonds have been trashed from A to D, which is junk status. That can also affect its chances of getting future finance severely.
The New York Times has the details of this increasingly common issue, which is now looking like a pattern of scams being perpetrated on America's cities and counties. Moberly is pretty typical of a very nasty situation affecting the whole nation. Cities around America are being hit with the costs of the failure of projects.
The NYT article is self-explanatory and doesn’t need regurgitation. This quote sums up the story so far:
Moberly, where the biggest employer is a state prison, had responded eagerly to a pitch by the Missouri Department of Economic Development to host the project, hoping for hundreds of jobs. The company, Mamtek International, was said to have a sucralose plant in Fujian Province producing a sweetener called SweetO, for use in drinks, candy and pharmaceuticals. Most of the authority debt, to go toward building and equipping the plant, was issued under a federal stimulus program allowing private investors to use tax-exempt municipal financing.
But when a bond payment came due last August, with the building still unfinished, Mamtek officials said they didn’t have the money. Construction stopped; the handful of employees in Moberly were laid off. Weeks of confusion followed, with subpoenas from the Securities and Exchange Commission, rumors of a split between the Chinese company and its United States subsidiary, reports that the plant would be liquidated and fears that the bond proceeds were gone forever.
Missing the point about Moberly
If you’re noticing that there’s a chronic lack of hard information regarding the actual state of the developer’s finances, you’re right on the money. Moberly, quite rightly, stated that the city shouldn’t be responsible for bailing out Mamtek. The city has already lost out. Why throw more money at a failure, particularly when everybody else is being so vague about the situation?
Guarantor or not, Moberly is at least being realistic about the facts of the matter, unlike the bond market. The bond market has reacted typically, and wrongly, to the Moberly position. A quick look at the demographics of the city will tell anyone with a basic knowledge of mathematics the situation.
Moberly had a population of 14,227 in 2008. The median income for a family is $37,488. This is a real American small town demographic. One look at this should show anyone with local government experience (I worked for a local government regulator for a decade) that the city’s revenue base is able to do so much and no more. That $39 million would have been out of reach of the town, without the various state and Federal incentives.
Revenue in small towns has to be managed well. Starting from a low base, there’s exactly so much to work with. Asking a town of this type to go guarantor on a $39 million deal is like asking a two year old child to carry a grand piano across the Rockies in its teeth, unassisted and with one arm tied behind its back. The cashflow cannot possibly pan out, particularly if the project tanks as thoroughly as this one obviously has.
The theory of municipal bonds is essentially “time payment for cities”. It’s a good idea when it works, creates finance, reduces outlays and makes things financially viable which would otherwise be impossible. The trouble is that these deals have been falling over across America, and nobody in the bond market is getting the message. A few failed projects could be considered bad luck, but this is now a pattern of abuse in progress for small town America.
There’s also a perfectly good alternative to guarantees which has been conspicuously not mentioned in all the hoo-ha about municipal bonds- Underwriting. This is normal practice in just about every other sector, and it makes more sense than asking cities for money they don’t have. You can insure anything through Lloyds or similar big name insurers, and for a defined cost upfront. Why this obvious option has been off the radar is debatable. It defies belief that a market as fond of number-crunching as the bond market wouldn’t be able to at least read the tea leaves on the crash scenarios for any municipal bond on issue.
It’s ridiculous ask for guarantees on a failure when you can see revenue has its limits before you even enter into an agreement. You don’t tell people staggering out of the wreckage to pay for a train wreck of which they are the victims. Theory and practice are working against each other.
Why is the municipal bond market so apparently naively assuming that all municipal projects are solid gold, AAA+ rated certainties, when the fact is that so many of these things have failed? Why does the market just naturally assume that all municipal projects are on the level and entered into in good faith, when so many contracts have mysteriously had their plugs pulled after conspicuously non-performing non-delivery by operators? The main reason is to shore up its own position, but you really do have to ask why so much emphasis has been placed on getting funding for failed projects using public money.
Why are Moberly and other cities being expected to blindly follow “process”? Should Moberly assume that they were dealing with saints, crooks or idiots? Why should they be "guarantors" for something which was never delivered? If you buy a can of baked beans, you're entitled to get baked beans, but if you're a US city or county, you can expect to have to pay whether the goods are delivered or not?
There’s an unholy stench attached to this deal, and it’s not coming from Moberly. The city did the right thing in principle, supporting a project which could have helped grow the town, create jobs and assist in revenue development. There has been an obvious failure of due diligence in the operation by the project, not the city.
There’s one basic rule in local government- Watch the money. That’s exactly what Moberly is doing and what other towns across the US are doing, and they're being responsible in doing so. How can so many different deals be falling through with the same unrealistic outcome? Precedent, or lack of sanity, or a combination of lack of sanity and numerical skills?
It beggars belief that Standard and Poor’s, the market as a whole, or a three year old poodle with a calculator could believe in this situation as a realistic option for cities, bondholders, or anyone else shelling out real money on city projects. Why is a city responsible by default for what appear to be systemic failures on a colossal scale by people obligated to deliver on their own services and commitments?
Is the idea that anyone can enter into a contract with a US city and just walk away under any circumstances leaving the taxpayers to pick up the tab? All that money just sails off into people’s pockets, and they pay for it? “Sorry folks, no services, we have to pay the nice people with the spreadsheets”?
Moberly should be a test case for the law here. The legality of these guarantees should be questioned and required to prove its validity, particularly in cases where the project operators are at fault. Many of these projects, notably in Jefferson County, Alabama, are understandably suspected of being just plain corrupt, and trashing cities left right and center. The bond market apparently doesn’t want to see these issues. Why not? Is there a law saying bonds are immune to realities, and that cities should fund frauds?
These city guarantees stink to high heaven of a heads we win, tails you lose setup. Cities should have some guarantees, too, before they’re under any sort of obligation to shell out a cent, let alone millions of dollars. The bond market should face the realities of the municipal bond issues, not just hide behind a theory.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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