VOL. 130 | NO. 34 | Thursday, February 19, 2015
City Debt Restructure Meets Council Resistance
By Bill Dries
First reviews from Memphis City Council members Tuesday, Feb. 17, to Memphis Mayor A C Wharton’s plan to restructure the city’s debt payments were harsh and skeptical.
Wharton wasn’t present in council committee sessions Tuesday as council member Jim Strickland played audio of Wharton in 2010 telling council members that the restructuring of city debt then was a “plain vanilla” transaction.
Strickland and other council members argue it is a key component in the city’s ongoing financial difficulties.
“Mayor Wharton sat in this room and told us this type of restructure was a widely accepted way for municipalities to refinance,” Strickland said. “This is the single worst financial transaction this city may have ever conducted. And I do not think that’s an exaggeration.”
City finance director Brian Collins told the council Tuesday that the 2010 restructuring came with a balloon payment that doubles in one year to $30 million in fiscal year 2020 – a crucial fiscal year for city finances. That is when the city must begin to make its full annual required contribution to the city’s pension liability under state law.
Strickland and council member Harold Collins, meanwhile, were sharply critical of the new restructuring, saying it simply pushes the debt balloon payment further out, just as the 2010 restructuring did.
“This is not the first time y’all have given us some bad advice and we had to fix it,” Collins told administration leaders. “The period this time is 2024.
“We’re still going to have it,” he said, referring to the balloon in debt payments. “You just moved it further back. That’s not acceptable to us. New leadership might not want to do that.”
Said Strickland: “It does not cut our debt service. It increases our debt service by $14 million. It kicks that bubble down the road to the next generation of city leaders.”
Council member Berlin Boyd agreed.
“I think there should be a better way for our city to do business – 2024, that’s the first debt payment,” he said. “What other options can we explore?”
But Brian Collins argued the restructuring proposal would smooth out the “bubble,” or balloon in payments, with lower interest rates and that without a restructuring, the city faces a balloon payment in the last year it has under state law to make its full annual required contribution to its pension liability.
“The alternative is if we continue to borrow at the rate we’ve always borrowed, we will face a very steep increase in our debt payments,” he said. “Over the next five years, we also have to grapple with the increase in our obligations for the pension fund. Tackling those simultaneously is going to be very difficult.”
Strickland wants the city to instead begin making the $74 million annual pension payment in two fiscal years, including the current fiscal year, and make that the city’s formal pension policy.
The city upped its $20 million ARC to $48 million in the current fiscal year.
Council member Collins favors making the new pension policy an ordinance instead of the resolution the administration has proposed. He argues it would be more difficult to change as an ordinance.
Council members voted Tuesday to hire their own consultant to review the administration’s restructuring proposal, just as they did to review the city’s estimates and projections on pension liabilities this past summer.
Council chairman Myron Lowery is expected to have some estimate next month on how much it will cost to use Segal Consulting of Atlanta, the same firm the council used for the pension discussions.
Council member Collins, who proposed last year hiring the firm to report to the council on the pension matters, argued that the administration initially estimated the pension liability at $100 million. The Segal consultants came in with a much lower estimate and the working figure agreed to by the administration was also lower than its first number.
“They saved us $26 million in two weeks,” Collins said of Segal.
The earliest there would be a council vote on the restructuring plan, which is already approved by the Tennessee Comptroller, is the March 3 council meeting. But a vote at that meeting seems unlikely with the move to a consulting firm.
The council could take a vote on the first of three readings on the pension policy also at the March 3 council meeting.