In a deal that might violate Tennessee’s state constitution, the city of Chattanooga agreed this week to issue state bonds on behalf of the exclusive Baylor School.
Chattanoogan columnist David Tulis reported on Friday that the city board issued a $13 million bond “to support capital improvements and debt retirement at Baylor School,” chartered as a nonprofit company in Tennessee.
Under the terms of the agreement, Baylor will pay 3.14 percent interest for the first decade after issuance, and then repay the principal over the following 10 years.
The bond, which was issued by the city and funded through Sun Trust Bank, “draws liquidity from 20 years into the future to be spent today,” with the school’s property acting as collateral, Tulis reports.
As collateral on state-issued credit, Tulis claims, “This property belongs to the board until the debt is paid,” and is therefore tax-exempt, as are any profits that might be earned from the bond. (RELATED: Obama’s Plan to Curb Muni Bond Tax Exemptions Would Hurt Local Governments)
If there is a default, Tulis argued, the bank can begin proceedings to seize Baylor as collateral, regardless of any ownership claims the city might have.
“The city is involved because it’s able to issue tax-exempt municipal bonds to educational institutions and other projects for the public good,” according to the Times Free Press, “such as $325 million in bonds it issued last year to expand Memorial Hospital.”
William Bulls, chairman of the Health, Educational, and Housing Facility Board, which approved the bond issue, told the Times Free Press that he supports such arrangements, “because they stimulate growth in Chattanooga.” (RELATED: Guilty Plea in Muni Bond Indictments)
However, apart from being “a picture of commercial government writ rich,” Tulis contends there is another problem with the arrangement, namely that, “The state constitution forbids the state from guaranteeing anybody’s debt.”
To get around the ban, lawmakers are simply pointing to a state law that says, “The municipality shall not in any event be liable for the payment of the principal of, or interest on any bonds of the corporation… and none of the bonds… shall be construed to constitute an indebtedness of the municipality.”
Once inflation is taken into account, though, Tulis points out that Chattanooga taxpayers could easily end up financing at least a portion of the bond’s real value. (RELATED: Ala. County Files Largest Municipal Bankruptcy in U.S. History)
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