David R. Kotok
What happens when you mix politics and municipal bonds
http://www.NewsAndOpinion.com | It's bad business when a government agency messes around with its bond covenants. That's what just happened at the DRPA.
There's a political squabble going on. The new "ins" led by a Camden County NJ politician are attempting a coup. Nothing unusual here. State and local governments witness this type of power struggle all the time.
What is unusual and potentially harmful is the way that politician expressed his displeasure.
The DRPA runs four bridges, a commuter rail line and other associated activities involved with the Port of Philadelphia. DRPA is a bi-state agency (NJ & PA). More importantly, for the readers of this commentary, it issues hundreds of millions of dollars of municipal bonds.
Those bonds have covenants. For the uninitiated, those covenants are the promises enforceable by the bond trustee. They are there for the protection of the folks who loaned their money to the DRPA to finance those bridges and trains, etc.
In an action which smells of political pique, the Camden politician organized a vote against the certification of revenues required under the terms of the bond resolution. This means the bonds could experience a technical default. Press reports suggest the Pol wanted to do something "symbolic, not substantive."
Sorry, Mr. Pol, this is the wrong place and shows bad judgment. It reminds this writer of the time Newt Gingrich wanted to hold up the Congressional resolution on federal debt in order to make his point about the federal budget. He rattled the market in U.S. Treasury debt then. That was bad policy, too.
In all likelihood the DRPA will soon pass the curative resolution and satisfy its promises to its bondholders.
Money does not seem to be the issue and the revenues seem to be there; however, that is now not completely clear. The Pol seemed to indicate that he was not certain that the financial requirements were met. That statement was reported in the general press and can be damaging to the DRPA. If it is true, the bonds will have trouble. If it is not true, one has to question why a leader of this board would make this statement without substantive research. Either way, making this type of remark is a losing proposition for this agency.
Here is what will probably happen. The municipal bond community will know that DRPA debt has a political color or odor. Furthermore, bond professionals know that DRPA politicians are willing to use the power of their office over finances to advance their political agendas at the expense of keeping their promises to their lenders. That attitude may infect future debt issuance of the DRPA which will now be subject to much more scrutiny by the professionals in the bonding community.
Will it cause the DRPA to pay higher interest rates in the future when it comes to the debt market? Probably not but we cannot be sure. Will it add to their cost of future issuance? It might. Will they end up paying a higher bond insurance premium for credit enhancement because of these antics? They might.
The fact is that the arcane area of municipal finance is off the radar screen of most of the general press and will probably escape scrutiny. (Dear Philly and NJ area news reporters: I would like to be wrong here.) Most folks yawn when they hear bond talk. But those who are stewards of monies lent to agencies like the DRPA will not forget this event.
Mixing politics and bond covenants may not hurt this agency but it certainly will not help it.
A personal disclosure: I served on the DRPA board not too long ago. In my tenure I do not ever remember
political differences among board members being applied to the financing resolutions of the authority. Good
policy separates politics from bond covenants. This was a sad day for the DRPA.
JWR contributor David R. Kotok is President and Chief Investment Officer of Cumberland Advisors, Inc. His articles and financial market comments have appeared in The New York Times, The Wall Street Journal, Barron's, The Bond Buyer and numerous other publications. He can be seen on CNN, CNNfn and CNBC. Comment by clicking here.
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