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10/16/2013 12:01:00 AM
Federal government fails to pay up as promised on city bond issue
Charles O'Neill

Budget cuts and the so-called "sequestration" at the federal government level have hit home for the city of Harbor Springs and may hit the wallet of city water customers, customers who are already dealing with increased rates from all of the system improvement projects over the past few years.

One of the bonds the city issued in 2010 to help pay for required infrastructure improvements took advantage of a special program at that time from the federal government called 'Build America Bonds" (BABs), part of the American Recovery and Reinvestment ('stimulus') act of 2009.

The city of Harbor Springs, due to its AA+ credit rating, usually goes through the traditional municipal bond market (non-taxable bonds) where it has gotten rates in the low 3-percent range. What the BABs program promised was, if the city financed through federally taxable bonds at a higher interest rate, the U.S. Treasury would provide a credit (payment) back to the city equal to 35-percent of the annual interest due on the bonds. This dropped the city's effective interest rate to lower than it could have gotten at the time in the municipal bond market. So long as the federal government sent in the reimbursement check.

This year, however, the city was notified that due to budget cuts at the Office of Management and Budget, the government was cutting the amount it reimbursed the city for the BAB bond payments. The cut this year was 8.7-percent, leaving the city on the hook for an additional $1,360 on this fall's twice-yearly bond payment.

'Default by Federal Government'

While that may not seem like a large amount, projected over the remaining life of the city's 20-year bond, it adds up. Not only that, the government could decide to decrease the payment even further, or cut it all together, said city clerk and treasurer Ron McRae.

"This is a default by the Federal Government," McRae wrote in a memo to city manager Tom Richards. "though they may take exception to the term I have used."

McRae said the first option they looked at when they got this notice was whether it would be feasible to refinance and refund the BAB bond, essentially start over with a traditional municipal bond issuance.

"If the City were to push for a refunding, a demonstrated savings would have to be shown following this action. Without the demonstrated savings, the Michigan State Department of Treasury would not approve a refunded bond issue," McRae wrote is his memo.

However, as this reduction by the federal government has only occurred this one year, there is no track record to prove there would be a savings. Nor has the federal government given any indication as to what further action it plans to take with regard to the BABs program.

"At the present time...I would recommend that we not jump into a refunding, but rather try to get some input from our congressmen and senators concerning the issue of continuing the sequestration rate reduction in future years and perhaps get an indication of the rate," McRae said.

McRae said any higher cost for this particular bond, because of the action by the federal government, would likely have to be born by city water customers in the form of higher rates.

Both McRae and Richards could only smile and say: "The only accountable form of government is local." It's where the citizens and government officials actually interact.


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