City Finds Bond Financer

Finance Director Thomas Bruce is on the verge of a deal to secure the city's $11.5 million deficit bond and expects to finalize plans today once the city signs off on the offer. 

The investment firm Lord Abbett has offered to finance the entire sum, and Bruce will meet with Mayor Leo Fontaine this morning to go over the final numbers, including the premium on the deal which is expected to come with an interest rate around 6%.

"There's not much that would sway our decision," Bruce said of the offer. "We're very fortunate because there haven't been a lot of groups approaching us."

At the City Council meeting Monday night, Bruce announced a preliminary agreement with the financial firm for half of the bond ($5.75 million,) which the city needs to improve its financial rating and pay debt accumulated over the past three years. An offer to finance the entire bond came through Tuesday afternoon.

The offer will relieve some serious pressure for city officials who are under a March 8 deadline to secure the financing. According to Bruce, the city has $11.9 million in notes that must be paid on March 10 to avoid default. The city's junk bond status means the debt comes with no insurance and has made securing investors a challenge. Bruce and Fontaine have worked to pick up purchasers with a sales pitch.

"We have a pretty canned one hour presentation we've done a number of times," Bruce told the Council Monday night. The finance director and mayor have held multiple teleconferences on the issue from City Hall.

Some objections to the city's plans were presented at the council meeting by Albert Brien, who questioned the legality of the council's decision to add an additional $1.5 million dollars to the bond to resolve cash flow issues with the school department. 

"I don't believe what was enacted is in fact statutorily correct," Brien said. "The one and a half million to the school department... under generally accepted accounting principals and practices, this does not meet the definition of a deficit. This is not a deficit - this is a cash management issue. It's a payable and a liability, and that's it."

"You're taking a zero percent liability and converting it to a six percent liability - it doesn't make sense. This one and a half million dollars is going to cost us over four hundred thousand in interest." Brien indicated the decision could be challenged.

Bruce responded that bond council attorneys had verified the legitimacy of the action and a Feb. 7 letter by attorney Ellen Corneau stated that  "an acceptable use of the funding bond is for payment to the school department."

"We can't borrow short-term anymore this fiscal year. We have been called for by our auditors to get rid of this humongous $3.7 million liability to the school and this bond gives us a pretty direct way of doing it," Bruce said.

"In the purest form the school would have no cash of its own. It is in our interest to put ourselves in the position that immediate cash flow is not at risk," Council President John Ward added. "We are protecting ourselves from cash flow deficiencies. We do not have a pure Generally Accepted Accounting Principles deficit, we have a deficit plus a high risk of cash flow deficiency that would compromise the integrity of our financial statements and therefore, our ability to turn this thing around."

"There are some people in this community that are of the opinion that this should have gone to vote. It's a matter of principle," said Brien.

Councilwoman Suzanne Vadenais asked Bruce what would happen if the decision were challenged in court.

"We'll default. Whether the state would come in here and take over our public safety, fire and police... that might happen, based on what we've seen a little of in the past"

"The default would bring years of set-back to the city, when right now the plan as it stands, the deficit funding bond solution gets the city back into a normal financial profile in due time. After two years we should receive our investment bond rating back," Bruce said.

"Commitments from the brokerage houses are already being made. So those would have to be uprooted if we ever had to go through the shear madness and stupidity of a court challenge." 

"Make no mistake, a default is a very serious issue and why anyone would want to trigger something of that nature, I'm not sure," said Fontaine.

The council is expected to discuss the city's financial outlook for the rest of the year at a work session next Monday.