Tennessee to Tweak Debt Policies, Require Locals to Do Likewise

BRADENTON, Fla. — The Tennessee State Funding Board is revising its debt-management policies in addition to requiring that all local governments adopt their own such policies by the end of this year.

The Funding Board, which issues the state's general obligation debt, will hold a public hearing Wednesday on its draft revised policies and guiding principles, which are similar to those adopted for local governments.

The four guiding principles to be used in developing policies state that decision-makers should clearly understand the transaction they are considering, details about offerings should be available to the public, conflicts of interest should be avoided, and the costs and risks of each transaction should be disclosed.

Local governments across Tennessee must adopt their own debt-management policies by Dec. 31.

"Since we are asking other governments to create or revise their policies, it seems only fair that we undertake the same sort of process on the state level," said Comptroller Justin Wilson, who is secretary of the State Funding Board.

Other members include Gov. Bill Haslam, Secretary of State Tre Hargett, Treasurer David Lillard, and Mark Emkes, commissioner of finance and administration.

Wilson said the State Funding Board's policies deserved review, "especially in the current market environment."

"I believe the changes in our revised draft policy represent an improvement over what we have now," he said.

The draft policies can be viewed at www.comptroller1.state.tn.us/sl/DebtManagement.asp.

The state's GO bonds are rated triple-A by Fitch Ratings and Moody's Investors Service, and AA-plus by Standard & Poor's.

The State Funding Board has already amended its debt-management guidelines for local governments to ensure that they comply with the Municipal Securities Rulemaking Board's revised Rule G-23.

The revised rule, which takes effect Nov. 27, will prohibit dealers from acting as an issuer's financial advisor on a transaction then resigning to serve as underwriter on the same deal.

The MSRB's amendments to Rule G-23 were approved by the Securities and Exchange Commission in May.

The revised G-23 also will prohibit a dealer that serves as a financial advisor for a particular issue from serving as the initial remarketing agent for the same issue.

The rule will permit a dealer to serve as successor remarketing agent for the issue if the dealer's financial advisory relationship with the issuer has been terminated for at least one year.

Written comments on the State Funding Board's draft debt-management policies, which also comply with G-23, will be taken through Sept. 6.

The board is expected to consider taking final action on the revised policies at its Sept. 8 meeting.

Tennessee has worked on strengthening debt-issuance policies across the state since early 2009 after Wilson learned that some local governments with variable-rate debt and derivatives exposure experienced costly difficulties following the market meltdown.

Wilson found many issuers — particularly small borrowers — had problems after bond insurers were downgraded, liquidity costs soared, and some had to make big swap-termination payments.

Wilson said he felt several issuers did not understand the risks of issuing variable-rate debt and using swaps. He also demanded more public disclosure of transactions.

After more than a year of policy development and public hearings, the State Funding Board in late 2010 instituted some of the strictest guidelines ever imposed for issuing municipal debt by establishing a model that required all issuers adopt their own debt-management policies by the end of this year.

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