Mt. Juliet doubled its debt in February, 2008

2008 Bonds

The City of Mt. Juliet borrowed $10,000,000 on February 26, 2008 in the municipal bond market. Prior to the borrowing, the City had $7.2 million in general obligation debt. AFTER the borrowing, the city owes $17.2 million to bond-holders. So, in one day, the City increased its debt by 138%.

The purpose of the bonds (and the uses to which the proceeds are restricted) are to construct roads and an animal shelter (and pay for any land as well as any related architectural, engineering, legal, fiscal and administrative costs). You can read the summary statement here.

emma

There’s a very nice online database called the Electronic Municipal Market Access that tracks municipal debt. The online database also includes a .pdf of the full 128-page Official Statement filed with the bond offering. Mt. Juliet’s Official Statement includes the full audit of the City finances done as of June 30, 2007.

The Official Statement filed by the City has a couple of howlers in it. The minor one is the continued assertion that Mt. Juliet is the fastest-growing city in the state of Tennessee. That’s demonstrably not true, as both LaVergne and Spring Hill have been growing faster over the past 5, 10, and 20 years. More serious is a mis-representation of the City’s audited fund balances on page B-13 (pdf page 48). The table filed by the City seems to indicate that the City’s Sewer Fund had a fund balance of $20 million in 2004, $23.3 million in 2005, $27.5 million in 2006, and $30.5 million in 2007. These numbers are wrong. The sewer fund had a fund balance of about $6.0 million on June 30, 2007 (see appendix C, pdf page 70). Whoever compiled the Fund Balances on page B-13 mistakenly picked up the Net Assets of the Sewer Fund rather than the Fund Balance (compare the numbers at the bottom of pdf page 66). Net Assets includes the value of all the pipe buried in the ground. It’s not readily available to pay future bond obligations. Overstating the amount of cash the City has on hand by a factor of five may very well be a material mis-statement of the City’s financial position. Cash on hand is certainly one of the key figures a potential bond purchaser might examine. If the City mis-stated a key financial fact, the bond issue may be void. Bond purchasers could conceivably charge fraud.

That’s the serious mistake, but there’s another mistake that’s just as troubling and demonstrates that the City (like Val Kilmer in Tombstone) has a “hypocrisy that knows no bounds.”

One of the pages of the City’s Official Statement includes a calculation of the per capita indebtedness of the City both before and after the new bond issue. Its page 45 of the pdf. The table there displays a line for the City’s population over six years, from 2003 to 2008. Here are the numbers:

2003 – 16,520
2004 – 17,274
2005 – 18,099
2006 – 16,520
2007 – 17,274
2008 – 18,099

Now given that the City had a certified special census done in 2006 that showed a population of 20,392, these numbers seem improbable. [heh]

We also know from the City’s fabricated explanation for the firing of City Planner Bobby Franklin in July of 2007, that they consider a mistake in reporting the City’s population numbers on a state grant application to be a firing offense. What should the penalty be for getting them wrong on an Official Statement for a $10,000,000Bond Offering?

On page 19 of the Official Statement, we find this:

CERTIFICATION OF ISSUER
On behalf of the City, we hereby certify that to the best of our knowledge and belief, the information contained herein as of this date is true and correct.
/s/ Linda C. Elam
Mayor
ATTEST:
/s/ Sheila Luckett
City Recorder

Here’s a link to an annotated copy of the Official Statement – MJ 2008 Bond Issue.

– Publius

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17 Comments

Filed under ethics

17 responses to “Mt. Juliet doubled its debt in February, 2008

  1. Butch Huber

    Publius,

    Let’s not be too hard of the Mayor, we know from a previous situation that the mayor doesn’t read what she signs.
    Butch

  2. Bobby Franklin

    Publius,

    “The stars may lie, but the numbers never do”

    Mary Chapin Carpenter

  3. Sonny Griffin

    Publius,

    In my humble opinion (it gets humbler every day), the financial information on page B-13 of the report is correct.

    The totals shown on the bottom of page B-13 reflect fund balances and retained earnings. Fund balance and retained earnings measure the ciy’s financial capacity at any point in time and establish the equity of that fund.

    Within governmental funds, equity is reported as fund balance.

    Proprietary fund (sewer fund) equity is reported as net assets. Retained earnings, in the form of land, capital assets, etc., are part of the fund’s total assets.

    Proprietary fund equity represents the difference between fund assets and fund liabilities. That figure is shown as Total Net Assets of the sewer fund on page 70 of the pdf or Total Assets minus Total Liabilities.

    Therefore, in my opinion, the $30,510,699 correctly describes the equity of the Proprietary Sewer Enterprise fund for the year 2007.

    Sonny Griffin

  4. Mr. Griffin:
    $30 million does describe the Net Assets of the Sewer Fund. But I don’t believe this figure could be described as either “Fund Balance” or even “Fund Balance and Retained Earnings.”

    The Table on B-13 lists the Governmental-General “Fund Balance” as $1,827,903. This matches the number reported as the General Fund Balance on page 5 of the Financial Audit in Appendix C (page 74 in the pdf). But the General Fund also has a Net Asset value. That is found on page 1 of the Financial Audit (page 70 in the pdf). The Net Asset value of all the General Funds is $9,164,491.

    Bottom line: the City used Fund Balance (not Net Asset value) for the Governmental funds in the table on B-13. But the City used Net Asset value (not Fund Balance) for the Proprietary Sewer fund. They are inconsistent within the same table.

    Which leads me to the conclusion that the values reported for the Sewer Fund are in error. They reported Net Asset value when they should have reported the Fund Balance (as they did for the Governmental funds)

    – Publius

  5. Butch Huber

    I am certainly not a bean counter by any stretch, but I don’t have to be a bean counter to know that there are some serious errors in this Bond issue.

    Let’s get down to the brass tacks here in Mt. Juliet. Bobby Franklin was fired from his position because he supposedly misstated populations on a grant proposal. Turned out Bobby didn’t fill out that grant proposal, and the numbers used were the numbers requested. Additionally, the city commission was aware of the numbers and that they were asked for, as was the acting city manager. However, here you are with the Linda Elam and Sheila Luckett with their signatures on a $10,000,000 bond document that contains misstated population numbers on it.

    Even if the numbers you two gentlemen are talking about are actually correct, how does the city get over the facts I have stated here?

    I don’t know for sure which one of you are right about those numbers, but I do know that they have to be consistent in how they develop the numbers. I also know that if the numbers are wrong it presents a major issue for the city.

  6. Sonny Griffin

    Publius,

    The equity of governmental funds is reported in fund balances.

    The equity of proprietary funds is reported in net assets.

    This is standard practice. There is nothing new or unusual here.

    The population figure “misstatement” in the report is lower than the actual census. If I were purchasing any of these bonds, the lower population figure in the report would make these bonds less attractive to me than the higher population figure in the census. The reason being, of course, is that with the higher population figure I have more debtors on the hook to pay me back.
    Therefore, I can’t see anything really sinister here.

    The challenge that we, as citizens of Mt. Juliet, face with this bond issue is to make damn sure that the money is spent for what it is intended for and nothing else.

    Sonny Griffin

  7. Bobby Franklin

    Sonny, a lender cannot put a lien on government assets in Tennessee. Therefore if a city cannot pay its debt there is another way to compel payment – court.

    A judge can force a financially mismanaged city to raise taxes to meet its debt obligation.

    Assets do not have the same relevance when lending to a public entity. The lender puts much more emphasis on cash flow, cash on hand, and the ability to tax.

    Overvaluing cash on hand would mislead a lender into believing the public entity is more solvent and less of a risk.

  8. Mr. Griffin:

    I agree, none of the errors appear to be sinister. Negligent perhaps, but not sinister.

    – Publius

  9. Glen Linthicum

    So what you are saying Bobby:

    “Therefore if a city cannot pay its debt there is another way to compel payment – court. A judge can force a financially mismanaged city to raise taxes to meet its debt obligation.”

    this would be the reason needed to raise the property tax. I can just see it (the City commision crys our hands are tied we must raise taxes!) Wow! The City may have just been maneuvered, probably unwittingly so, in to a ripe position for a property tax.

  10. Sonny Griffin

    Publius, Bobby, Glen,

    This bond issue provides a perfect mechanism to set the property tax at a higher rate than $0.00. Please read pages 1 & 2 of the official statement on EMMA .

    It is stated under Security on page 1, that: “The bonds are secured by the unlimited ad valorem taxes to be levied on all taxable property within the corporate limits of the city.”

    It goes on to talk about the property tax and how it is set at $0.00.

    As an investor in these bonds, I don’t need a judge to collect my money for me. By having unlimited taxing power, the city is going to pay me because it theoretically has unlimited funds to pay its debts.

    Bobby, there has been no overvaluing of cash on hand that I can see. Again, the sewer fund being a proprietary fund is reported in net assets and investors in municipal bonds know this.

    What we need to worry about is that by giving money and assets away (the YMCA Deal for instance), our geniuses at the head of our city government put us a little closer to having the mechanism provided in the bond issue to increase the property tax rate sprung on us.

    Everybody have a nice week end. See you next week. Chores await.

    Sonny Griffin

  11. Bobby Franklin

    Sonny,

    For a private entity borrowing money net asset value is key for a lender to consider. I have been to those auctions.

    Assets have much less to do with a public entity’s ability to pay debt. How could we auction off the sewer lines that are in the ground? Yuk

    My point is that public assets cannot easily be converted to cash nor compelled to be. Cash on hand can be used to pay debt, assets generally cannot.

  12. Butch Huber

    Whether there was an intentional effort to defraud investors or not, there is a very large issue here to contend with. Bobby Franklin was fired for cause based mainly on a grant proposal that contained information that the certain members of the city leadership felt was wrong. Even though it was pointed out that he was not at fault, the city made no effort to correct the wrong done to Mr. Franklin. He was robbed of his position with the city and robbed of a position he had a right to enjoy. The city could have fired him just because, but Sheila Luckett did Bobby a great big favor by sending him a letter detailing why she fired him. She stated the main reason for his dismissal was over the grant issue.

    Then, she and the mayor of this city both put their signatures on this written statement that contains erroneous information. Some of the errors are very simple errors that anyone reading this statement would pick up on.

    When Rob Shearer was forced to resign he was told that the reason behind it was that things were slipping through the cracks and that the commission had lost confidence in him.

    Shouldn’t the commission and city leadership in place today be held to the same standard as those people who are now on the outside looking in?

    While I agree with Mr. Griffin that the lower numbers in the population figures actually makes the bonds look less favorable, it doesn’t quite fix things. First, if the numbers are off in one direction without being caught they could just as well have been off in another direction. Secondly, since these bonds are sold at auction, the case could be made that an error in the numbers could ultimately convey a benefit to one party while depriving another party of a fair and accurate picture of what is really being offered. This is the second time that I am aware of that the Mayor has signed something that she should have read and obviously didn’t, or at least didn’t read well. The mayor is a very intelligent woman, she should have caught this mistake. As an attorney she certainly should know better than to sign something that she hasn’t closely read. Had she closely read this statement she would have caught the errors. Furthermore, this statement says that the mayor will decide where certain funds are invested….that is not the mayor’s purview….it is the purview of the commission. She should have caught and corrected that error as well. If the numbers are right on the assets issue it will make what has happened here less serious, but it will never-the-less remain a very important issue.

    Ed Hagerty signed something he shouldn’t have and he got censured for it…others have made errors and have lost their jobs…shouldn’t things be consistant?

  13. Butch Huber

    Publius,

    Just a reminder that it is time to send out the invitations to the spring cabal.

  14. Aunt Bea

    Enquiring minds want to know:

    What exactly does one wear to a Spring Cabal: formal or tea-length?

  15. Butch Huber

    I want to bring something to everyone’s attention if I may. I was reading the written statement for the $10,000,000 issue when I ran across something that really caught my attention. The thing that caught my attention was the term “unlimited ad valorem tax”. I had to go look this up this term to be sure my perception of what it meant was accurate. What I learned gave me a deeper understanding of some things.

    I guess I always knew that the government has the ability to tax us right out of house and home, but there was the proof on an actual debt obligation.

    Unlimited ad valorem tax basically means that the city can raise property taxes as high as necessary in order to meet its obligation under the terms and conditions of this bond issue.

    Do you think that there are people in this city whose finances are right on the brink of disaster? Is it possible that someone out there is in a position where they are just making it week to week, but who won’t make it if their property taxes are raised? I do.

    I understand that the county is planning to raise their property tax rate soon. Now the city of Mt. Juliet is increasing its debt load by 12 million dollars at a time when the city simply cannot afford it. They say that the purchase of the old MJES site will be financed by the hotel/motel tax, but that tax won’t cover the bill by half. Furthermore, if they spend all of that tax, which was originally enacted to pay for city owned parks and recreation, what will they use to update, upgrade and build city parks and recreation? Make no mistake, this commission’s reckless financial behavior will ultimately cause the city of Mt. Juliet to have to raise the property tax rates from zero to some other amount. When that day comes they will blame a lot of different causes for the need to raise the property tax rate. It will be their tax and spend behavior that causes us to have to pay city property taxes, but they won’t stand up and take responsibility for it.

    Let’s go back to that person on the brink. Let’s say that she has had some bad luck in life. Let’s say that, for no reason of her own, she has gone from doing fine in life financially to just getting by. Let’s imagine for a second that she is trying to get a little wind in her sails financially so that she can get back up and running financially. For our scenario we will say that the person in our example is a mother with three children whose husband just ran off with another woman. The mom is doing the best she can to hold the family together. She is working two jobs and doing the best she can as a mom. Her husband is a deadbeat bum who doesn’t send her any money and she can’t even find him. She owns a home, and has been working hard to pay off some debt so she can have some breathing room financially. She is looking forward to one day being able to give up one job so she can spend some time with the kids. She has been doing the Dave Ramsey thing and has been paying down her debt snowball. Then, because the city wants to do things that it can’t afford, she gets a new tax bill. She now can’t pay down her debt snowball any further, and in fact, she can’t afford to pay the tax in full. Because she can’t pay the tax the government comes in and takes away her home. (Now, I realize that there are many other stages to this process, but unless you want me to write a book, I will stop with this and skip to the end.) Now, we have a homeless mother of three where we once had a fighter trying to keep her head above water and take care of her children the best that she can.

    Do you think this happens in this country? It happens everyday.

    Unlimited ad valorem means it can happen to you and I as well. The word “unlimited” means without condition, without boundaries, without limit. By the way that I read it, the city has the ability to raise property taxes without limitation. I sure wish I could do that. I wish that I had some sort of business where I could make as many foolish mistakes as I want and then just pass the bill for those mistakes on to my customers, who in turn have to pay the bill regardless of how they feel about it.

    Can you afford another $50 per month? How about $100 per month? Perhaps it would take $200 per month to tap you out financially. For some, you could afford a thousand a month. However, I would be willing to bet that fifty dollars per month would cut into the lifestyle of a substantial portion of the population of this city. $100 per month would really start to hurt. $200 per month would have a real harmful effect on a large portion of the city.

    Let’s say that the city and the county raise property taxes by enough of a rate that it costs the average homeowner an extra $100 per month in taxes. If a twenty-something person were to invest that money rather than pay taxes with it how much money would that generate for that person throughout his lifetime? It would grow to over $500,000. So, rather than this person having a shot at being self-sufficient when they get older, they may become dependent.

    That is the problems with what is happening in our society. Government doesn’t seem to realize that it is not their purpose to provide everyone with what they want or need. I mean, if we are going to have a YMCA, why can’t I set up a non-profit movie theater and have the government give me grants to build my theater? Isn’t being able to relax for a while just as important to a person’s well being as being able to go exercise their body? Or how about a non-profit massage clinic? What makes the government the determining authority of what is and isn’t important?

    So here we are, poised for a new property tax, and the vast majority of the people in this city don’t even see it coming. They are making decisions, whether good or bad, to finance that new car or that new sofa. They are making the decision today to purchase that new boat on terms. They are putting braces on Jimmy’s teeth. They are signing on the bottom line to purchase that new home. There are many people who are making decisions about their budget based on the current set of circumstances all the while not knowing that a property tax is coming their way.

    Someone please tell me; as a percentage of income, how much tax is enough? Isn’t there some number that we can set as the maximum? Couldn’t we as a society just say….”when everything is said and done, when you include each and every tax you are charging us, on every level; when you put the entire package together, you are not allowed to tax us beyond this number as a percentage of income”? If you were to decide that number, what would it be? Would you say 5% of total income? How about 10%? Would you go for 20%? Could you see your way clear to pay as much as 30%? How much would you moan and groan at 40%. Would it keep you up at night if the tax was set at 50%? How many would say, it is fine with me if the government takes half of my money and leaves me with the other half? I am sure there are a lot of people who would be very happy with that right now because it would cut their tax bill. For those who believe in the God of the Holy Bible, would you set the number above 10%? If God can run the universe and only charges us 10%, can we justify paying the government more than 10%?

    There will be some who read this post who say, “Com’on Butch, even if they raised the property tax rate to pay for the entire purchase of the school property rate it would only raise the average person’s taxes by maybe $60 per year for the next five years.” To which I would say, “that means that 6300 households paid $60 each so that 700 households could enjoy the YMCA. But it is actually worse. You see, government has an insatiable appetite. Wherever it finds a place to feed it gorges itself. Do you really think that once we have a property tax that it will stop once the YMCA project is paid for? No, they will build high end fire halls, buy fire trucks, build a city office building, develop more roads, increase services, upgrade furniture, hire more and more people to staff the city, and find other ways to spend money. While some of those things may be a good thing for the city, if you and I are willing to pay the bill for those things without screaming and shouting and putting up a fight the city commission will let us pay the bill instead of going to the county for an annual rebate to the city for all things that the city now provides that would have been county liabilities…such as fire protection service.

    Mark my words, before long you and I will be paying property taxes that we never should have had to pay. And when that happens you will know who is at fault…their names are Ray Justice, Ed Haggerty, and Will Sellers.

  16. Joe Fleenor

    First time on this website. Great stuff!

  17. Butch Huber

    Welcome to the party, Joe!

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