Town of Buckhead Threatens Bond Ratings, Experts Say; defenders have answers


By John Ruch

Buckhead leaving Atlanta would likely have long-term negative effects on bond ratings in both cities and the metro area, according to two university municipal finance experts, supporting critics who say secession would make local projects and budgets more expensive. tighter. But city advocates say they have answers to such concerns.

Bonds used to fund government projects have become a major issue in the city debate, especially given the precedent of Eagle’s Landing’s similar – but not identical – failed attempt to separate from the town of Stockbridge in 2018 The move triggered warnings from major bond rating agencies about the statewide impacts and led to a lender filing for legal action.

The Buckhead City Council (BCC) downplays the issue, saying both cities will continue to have strong revenue bases and that Buckhead will still pay a fee to use Atlanta’s bond-funded services like water and sewers. Bill White, chief executive officer of the BCC, says that “it is not certain” that Atlanta’s credit rating is affected and that the quality of its management would determine it.

White also pointed out the big difference from the situation at Stockbridge. Unlike Eagle’s Landing, Buckhead City is prepared to continue to shoulder its share of Atlanta’s bond debt after the split. “This action will set a clear precedent for ensuring the capital markets that debt holders will not be adversely affected by future city action in the state of Georgia,” White said.

Critics like the Committee for a United Atlanta (CUA) predict credit rating chaos and lawsuits, largely based on Stockbridge’s precedent and general uncertainty over the unique situation of a major de-annexation. A major authority expressing this concern is the Georgia Municipal Association, a statewide 537 city advocacy group.

Bond ratings are the main reason the “GMA will oppose the creation of any new city using portions of an existing city”, including the “potential bad political choice to carve Buckhead out of Atlanta”, Tom Gehl, organization’s director of government relations, mentioned.

“Creating a new town of Buckhead out of portions of Atlanta would not only hurt Atlanta. It could hurt taxpayers statewide, ”Gehl said. ” If that [cityhood] With legislation passed, it is possible that credit rating agencies are essentially degrading the municipal bond market in Georgia, thereby increasing costs for city taxpayers in the state.

University experts intervene

Experts with similar long-term concerns are Daniel Bergstresser of the International Business School at Brandeis University and Justin Marlowe of the University of Chicago, who is the journal’s editor. Budgeting and public finances.

“If Buckhead is allowed to leave, there is a chance that other neighborhoods will leave in the future,” said Marlowe. “This creates long-term uncertainty about Atlanta’s tax base, and some investors would undoubtedly avoid Atlanta bonds as a result.”

Justin Marlowe of the University of Chicago.

“It’s the kind of thing that would create a ton of uncertainty and risk in the bond market,” Bergstresser said. “That would make [bond financing] much more expensive. What would have been cheap would become more expensive. What was easy would become difficult.

Bergstresser and Marlowe have given mixed to negative reviews of the short-term impacts of the municipal bond shuffle after the split. Bergstresser was concerned that the two cities would have less diversification of income sources than they do together, which could affect both short- and long-term bonds and other investments.

Marlowe said in the short term he thinks “to some extent both sides are right.” From the point of view of opponents, the loss of a property tax base by Atlanta “would undoubtedly affect the negotiability and credit quality of its debt,” he said, adding: “It is difficult to predict the magnitude of this effect ”.

At supporters’ points, Marlowe said, refinancing of municipal bonds is common. “There’s definitely a scenario where Buckhead leaves and Atlanta renegotiates the terms with its bondholders. Atlanta would be at a major disadvantage in these negotiations, but it is possible, ”he said.

Daniel Bergstresser from Brandeis University.

The uncertainties and the long-term outlook are far more worrying, the two experts say, as investors question whether more neighborhoods would move out of Atlanta or other cities – or even move away from the new Buckhead City itself. Bergstresser said Buckhead City could have problems if it wanted to issue its own bonds due to its appetite for the dramatic political moves demonstrated by secession itself. “Any type of buckhead-only bond investor would look at the new town and say, ‘This town is full of people who love to blow things up,’ he predicted.

Bergstresser also expressed concern about the wider possibilities for increased infrastructure costs. “I agree with the critics of the de-annexation proposal when they say that Buckhead on the net is taking great advantage of the opportunity to share infrastructure and utilities with Atlanta,” he said. “And that, in an economic sense, is inextricably linked to Atlanta… and I think lifting that and creating friction in terms of infrastructure development is likely to increase its costs. This is unlikely to turn out well.

Marlowe noted that Atlanta bond debt is not a solo situation. Citing the city’s fiscal year 2020 audit report, it noted that it had $ 655 million in “overlapping debt” shared with other tax jurisdictions, such as DeKalb and Fulton counties. “Buckhead’s departure would affect the credit quality and marketability of this overlapping $ 655 million debt,” he said. “The size of this effect depends on many factors and is difficult to know, but there would at least be some effect.”

The Cityhood group’s response

White said the BCC was consulting its own municipal bond experts, including law firms Murray Barnes Finister and Riley McLendon, as well as specialist investment banking firms. He said the BCC has an answer to all the concerns of academic experts.

Bill White, Chairman and CEO of the Town of Buckhead Committee.

“Atlanta will not be required to refinance any debt as a result of the creation of Buckhead City,” White predicted, as the majority of its debt is for water, sewer and airport services, which do not earn revenues. would not change if the new city operated as proposed by BCC. . And there’s this promise to continue paying the local share of Atlanta’s existing debt and hotel / motel and rental car taxes.

“To conclude, there will be no negative effect on existing Atlanta debt holders,” White said.

As for Atlanta’s bond rating, White said it depends on the city. “With respect to the effect on Atlanta’s credit scores, Atlanta will continue to have significant and diverse sources of income after the creation of Buckhead City, so it is not certain that the credit score of Atlanta is affected. If Atlanta presents the rating agencies with a credible plan for how they intend to manage the city responsibly after the creation of Buckhead City, Atlanta’s credit rating should be affected only minimally, if at all. ” , did he declare. “… All the ingredients will be in place to ensure that Atlanta continues to be highly rated. It’s just a matter of how they choose to run the city.

As for Buckhead City, White pointed to a baseline cost and expense feasibility study, a required part of the city-building process, which he said shows the new city to be financially sound. “We are confident that Buckhead City will have no difficulty in accessing financing markets on favorable terms if Buckhead City is in need of financing,” he said.

The “extremely unusual” unknown

Surrounding all the predictions, for or against, is the fact that de-annexation is essentially a big unknown with little precedent. As Bergstresser noted, this is an “extremely unusual thing” and a “risk that the municipal market may not have thought about as much as it should.” And the only clear precedent – Eagle’s Landing / Stockbridge – scared the market. “They said, ‘We don’t like the sound of that,'” Bergstresser said, recalling warnings of statewide declining credit ratings from Moody’s and S&P Global.

Another precedent that might support arguments on both sides comes from another city phenomenon that even opponents of Buckhead City take to be normal: Atlanta’s wave of new metropolitan cities led by the 2005 incorporation of Sandy Springs. The town surge was followed by serious financial woes and credit downgrades in DeKalb and Fulton counties – in 2011 and 2013 respectively, where the Dunwoody and Sandy Springs incorporations were cited among many issues.

“It is possible that an incorporation of Buckhead could lead to a downgrade of a rating agency for Atlanta” based on this “similar story of such rating agency behavior” as a result of Dunwoody and Sandy Springs, said Natalie Cohen, president of National Municipal Research, a New York City. independent company based on national and local tax matters. “I do not imply direct cause and effect [from cityhood]. There were many factors involved, ”said Cohen, who noted that the loss of tax revenue from Perimeter Center counties in the two incorporations was significant.

News reports from the time show messy political disputes with references to the tax base affected by the incorporations. Fulton’s was particularly agitated, with state-level efforts to force the county government to downsize as it complained about the loss of revenue from the Sandy Springs area. Among those cited in the Atlanta Journal-Constitution at the time, telling Fulton that his credit problems were his own fault and that he would have to downsize following the city’s incorporations, was then State Representative Edward Lindsey, who is now co-chair of the group anti-Buckhead City CUA.

The concern with bond ratings is part of a broader criticism from opponents of the city that it is simply an unpredictable idea and companies don’t like unpredictability. For the Atlanta situation, Marlowe said the effects – perhaps large, perhaps minor – are indeed unpredictable due to the wide variety of factors: how much property taxes are lost, if bond investors can prosecute, what legal precedents apply, whether rating agencies are involved, and more.

“Each of these cases of secession is a little different when it comes to these factors,” he said, “so it’s difficult to predict exactly how investors would behave.”

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