Sedona AZ (May 21, 2013) – by J. Rick Normand, Financial Columnist to the SedonaEye.com
At the end of my last article, I said “Please stay tuned for my next article entitled “The Story of Sedona: The Futile Attempt to Cure a Problem With Its Cause.” That article will have to wait since the issue herein is too critical. I apologize to you all.
Now then.
Near the beginning of the April 26, 2013, City Budget Workshop meeting, Agenda Item #3, Mayor Rob Adams made the remark that “GO-Bonds (general obligation bonds) can go before the voters on even years in the fall” relative to City Hall’s 10-Year CIP projected $33 million dollar budget shortfall over the next five years – which would, of course, impede the financing of future capital improvements costs. In other words, don’t worry about further cutting of marginal needs and mandates, or, more importantly, finding non-tax revenues, because the City can just borrow more.
Mr. Mayor, I am here to tell you that you’re dealing in false hopes. It’s not going to happen that way.
Sedona, welcome to the world of globalization!
J. Rick Normand
The U.S. will soon face a complete restructuring of its utterly discredited national bond rating system by virtue of the creation of a new “world bond rating agency,” managed by the U.S., China and Russia, whose purpose will be to regulate the issuance of reliable bond ratings of all stripes. This new system will make it far tougher for non-investment grade issues to get an investment grade rating and for those close to non-investment grade rated bond issues to keep bottom-tier investment grade ratings in tact.
This situation will hit Sedona hard, very hard!
Unfortunately, this new system, detailed below, won’t help much to bring world-wide stabilization to the world economy, or its centerpiece, the U.S. economy. But, it will give the western central banks a little more time to prepare for the worst.
The reason this is being done? The U.S. is having a very difficult time getting foreign investors to buy into our capital markets. Why? Because we have proven to be untrustworthy due to so many scandals, corruption, and our Government’s inveterate misrepresentation of our true economic state, resulting from issuance of inaccurate economic statistics for the last four years. So the only way the U.S. can get back offshore investors (sucker them in, again) is to show that we’re making an effort to take corruption out of our bond ratings system.
Meanwhile, China is our blood enemy. So, why would they help us? Because they own $1.2 TRILLION Dollars worth of U.S. Treasury Bonds (they are our creditor, we owe them that much money) that no body will buy from the Chinese either. Notwithstanding, it’s in China’s best interest to help us clean up our horribly discredited reputation. As for any benefits to the U.S., it will enable our Treasury Department to run up considerably more debt to be sold to unwary foreign investors.
But, the U.S. economic fundamentals are still teetering. This won’t change that. In fact, in the long run, it will just make things worse since we can never pay off the debts we have now. In the interim, though, it will make it even harder for small municipal bond issues like Sedona to get an investment grade rating for new bond issues. That’s why this situation will come down on Sedona’s collective head just at the time when our Mayor thinks we can just tap the bond market anytime we want if we have a cash flow problem!
Nope, it’s not going to happen that way.
Here are the details as to why the Mayor, or any future Sedona Mayor and Council, will be confronted by a rude awakening when they next try to tap the muni-bond/general obligation bond market:
THE UNIVERSAL CREDIT RATING GROUP (UCRG), the new international bond credit rating alternative to Standard & Poors, Fitch, and Moody’s will challenge all current credit rating systems. A balance of debt rating power is being forged amongst China, Russia and the United States. A new agency will have the Chairman come from the Chinese Dagong (rating agency). It will be developed over the next six years, and will based in Hong Kong beginning July 2, 2013 [sources: GlobalTimes, May 8, 2013, Beijing; Gulf Times, May 20, 2013, Dubai; and EU Times, May 20, 2013, Brussels; and very little mention in the U.S. press].
China, as the largest creditor of the U.S., after our own FED, has demanded the establishment of a legitimate alternative to the compromised and corrupt American credit rating agencies of Fitch, Moody’s, and Standard & Poors – and our Treasury Department listened. The Universal Credit Rating Group (UCRG) is a joint venture put forth by the Chinese, Russian, and Americans. The Wall Street tools were forced to make concessions after the disaster occurred last decade under their guidance on debt quality.
The small U.S. ratings agency Egan-Jones Ratings Company and the Russian “RusRating” will become partners with Dagong Global Credit Rating in the new venture: The new UCRG agency will start with approximately twenty analysts with plans to grow to more than 100 in the future.
UCRG will be the second such venture based in Hong Kong, the group “China Chengxin” established an office in Hong Kong in August 2012. The project is aimed at providing China with an opportunity to provide a major contribution toward influence on the global bond ratings system – which directs investment traffic to the bond market. The big American debt ratings agencies were not asleep on the watch in the last decade, but rather, they were compromised by Wall Street, bribed by inordinately large client fees, and undermined by the U.S. Treasury. Their flawed business model and pervasive bias remains a hot topic, a deeply controversial issue since the global financial crisis in 2008.
For instance, the U.S. Government should have a junk debt rating worse than Spain or Italy, closer to the abysmal rating that saddles ill-fated socialist Greece. Yet the U.S. Government rating remains investment grade due to fierce political pressure from Washington and Wall Street. Many experts say the ratings agencies are largely to blame for fueling the crisis with inaccurate and excessively high ratings for problematic mortgage-backed securities and leveraged bond derivatives, which led to our national credit collapse.
The fear of rising Asian power is evident. The current Dagong chairman will become the new UCRG chairman, namely Mr. Guan Jianzhong. The current system is badly disposed towards favoring developed economies; the goal is to create a global debt ratings system with more regional balance. The new institution will not happen soon. Its new chairman has indicated that UCRG plans to create a new credit ratings system that will accurately disclose credit risks between creditors and debtors before the year 2020.
But that could be about the time Sedona has to go to the bond market again.
Sean Egan, the president of Egan-Jones Ratings, said the UCRG aim is to provide an alternative ratings system with voices from new partners whose perspectives come from different countries. Egan said, “The current system is New York-centered. UCRG will bring the perspective of China and Russia to the table. That means UCRG will get a different rating results from the big three.”
Note that the big three U.S. rating agencies once again are loosening standards, exactly like they did in 2004-2006 preceding the massive credit market crash. They prefer not to alarm the investment community (that is, warn them) and prefer to keep the flow of fees from their corporate clients (deep vested interest and bias). Same pattern, same corruption, same ineffectiveness, same lost warning device, same collusion, and coercion, just like the U.S. Government does in behalf of its toxic U.S. Treasury Bonds.
Meanwhile, Sedona’s City Administration thinks it lives in a vacuum. Once it did, but those days are past.
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To Our Readers:
During the last four years, Sedona’s bond rating has dropped two grades from Aaa to only A (see bond rating scale below) which means its credit was deemed only slightly above average over 2 years ago.
Sedona is on the cusp of another downgrade if its economy doesn’t improve in the second quarter of 2013, which doesn’t look likely. One more notch down and our town goes to the lowest investment grade.
The new UCRG rating standards are going to be much tougher and will probably take all but top-tier municipal ratings down another grade, automatically. That would put Sedona at Baa, the lowest possible investment grade to investors.
The Mayor, or some City spokesperson, will likely refute this article’s premise by pointing out that a Sedona GO Bond issue wouldn’t be affected by whatever Sedona muni-bond rating the City has at the time of the GO Bond issue because it will be secured by property tax revenues. That’s a misnomer!
Even if Sedona should vote in a property tax, that hypothecated stream of revenue is also secured with potential tax liens which are a secondary, and very possibly, a tertiary source of revenue from collateral tax lien liquidation. That prospect, in either a falling bond market or a declining real estate market* as we saw after the 2008 crash, still doesn’t absolve the city from having to meet the primary GO Bond market qualification standard, namely, an investment grade bond/credit rating rather than property tax revenues. Here’s the rating scale:
*go to this link: http://www.zerohedge.com/news/2013-04-29/presenting-housing-bubble-20, and then, to this link: http://www.zerohedge.com/news/2013-02-12/look-real-agenda-behind-nar
Aaa: This is pronounced “triple-A”. This is the highest rating Moody’s assigns issuers and individual bond issues. This is the strongest category of credit worthiness.
Aa: Pronounced “double-A”. This the next highest tier of Moody’s. It implies very strong credit worthiness.
A: Pronounced “single-A”. This is the third highest tier. It implies above average credit worthiness.
Baa: Pronounced “B double-A”. This is the fourth highest tier and the lowest tier of what is generally considered ‘investment grade’. This implies average credit worthiness.
With regard to the $33 million shortfall, the Council eventually whittled City staff’s capital projects ‘dream list’ down to a $12 million shortfall — $2 million for each of the next five years.
Instead of further cutting, plans were made to bring the General Fund and the Waste Water Enterprise Fund Reserves down by 50%. Still, as Rick indicated, the City will have no funds left for capital projects beyond next fiscal year.
In addition to Mayor Adams, Councilor Williamson also spoke in favor of GO-Bonds.
By the way, enterprise funds cannot be used for purposes not related to the enterprise. Yet the City Council plans to raid the Waste Water Enterprise Fund Reserves to help pay for non-WW capital projects such as streets and drainage.
Since only 60% of us are on the sewer, the other 40% are off the hook. Isn’t it discriminatory and grossly unfair for the 60% of us on the sewer to be gouged for the approximately $10 million needed to help pay for streets and drainage while the rest pay nothing?
The City Council is scheduled to set the budget cap at the May 28th Council meeting.
No amount of robbing Peter to pay Paul will work now. Face the music.
Why is it difficult to cut the budget? Because your buddies are going to slam you in the next election. It’s come-around time for you folks on the council. You were so sanctimonious.
Because time share folks don’t pay bed tax because they own deeded properties, then why doesn’t each and every TS owner pay a monthly sewer fee. Is it $40/MO? since they are one reason the entire city isn’t on the system. how’s that for a solution for city funding that should have been collected a long long time ago. how many time share owners? @ $40/MO what does that add up to. Jean, do you know? Wake up city council.
Rick, you are awesome! Some Sedonans might say you are shouting “FIRE” in a burning theater, but without you, who would have the courage to call our attention to the fact that our “theater” is burning? That our City Counselors are even having a discussion about a City property tax is frankly embarrassing. The answer is not to give our irresponsible City staff and our “elected representatives” more money. It is time to tighten our belts and prepare for a rocky financial ride.
Mr. Normand, like your article and all told its merits outweigh its negatives. But I see an ineffective argument here that the Chinese have every reason to help us succeed. They want us to fail. Once they finish gathering all our technology and government secrets, we’re a piece of land to be acquired to offload a billion of their inhabitants that they cannot feed. I don’t believe in conspiracies, think it’s a load of bunk, but I do believe in poor governing by local, state and federal officials have lead to our overall poor direction and demise. From Clinton on we’ve been sold a pot of puss. It stinks.
Sedona Cynic,
From your third sentence on, you are absolutely correct. Please, though, don’t misunderstand what I’m saying. The Chinese will only help us to the extent that it will help them. They own $1.2 TRILLION worth of US debt instruments known as US Treasury Bonds. There’s no way they can sell those to any half-aware investor on this 3rd rock unless these would-be investors believe that the US bond market is trustworthy. They certainly have no reason to believe it now. No one in power in this country has the know-how or the motivation to clean up our bond market mess unless outside powers step in and do it for us. Once that happens, the Chinese can get their money out of here. And, that’s why they will help us, for now. But, once they have their money in hand, they will, as you say, drop the hammer on us with all the might they can muster.
This ‘spend what we can while we’ve got it’ mantra of our Mayor and City Council flies in the face of any fiduciary and financial responsibilities they were elected to uphold. City Council has been awarding expensive contracts for ridiculous pet projects (over a hundred thousand dollars for picnic tables at our sewer plant) with alacrity and abandon. Does our Mayor and City Council think money is going out of style? Maybe it is. As J. Rick Normand points out so brilliantly, BEWARE…when the money is gone, it’s gone. Then what?
With all due respect J Rick, (and thanks for the education on the various Bond ratings) China really isn’t our local problem — I’d call our local problem being our City Council and their dreams of spending money that is simply not theirs to spend and via any means they can dream up only in order to “play” with their personal agendas!
Many have screamed “Fire” about this and the last council! The biggest scream was when the elected (anointed) were just driven to own 89A in West Sedona. Guess the citizens pulled their fire trucks out of their garages and put out that fire. Thank heavens we are lucky enough to have outsmarted them as the State continues to own that stretch of Major Hiway running through town.
Lets just all get real and get back to how badly Council wants to spend money and All the lengths they will go to.
Sharlett
Terrie Frankel writes that City Council has been awarding expensive contracts for ridiculous pet projects (over a hundred thousand dollars for picnic tables at our sewer plant) with alacrity and abandon.
$100,000 for picnic tables??? Good god even ADOT the spendthrift spent less on entire rest area refurbs!!! Call California and buy its closed rest stop picnic tables or look in an ADOT warehouse. Damn you people are lazy bureaucrats. Put staff to work and get them on the phones or eBay or ask the prison to build more like they did for the bus stops at an inflated price elsewhere. Idea not working for you yet? Call WALMART.
Everybody’s talking about the Chinese buying up food production & agribusiness now but they’ve been at it secretly through shell companies for the past decade. Why is everybody surprised to hear the Chinese bought Smithfield hams and now will own the town? The lining in those owners purses is of pure gold and Smithfield Virginia is done for because money bought pride & quality. Instead of being known for ham they’ll be known for spam when the chinese get done processing it. Who would have guessed that J. Rick Normand had something right, Josh?
To AN AHA MOMENT
In answer to AN AHA MOMENT’S query about what our sewer fees add up to:
$7,741,811 are the fiscal year totals thru March 2013 (9 months) from the City’s Finance Dept.
This amount includes service charges for sewer service, permit fees, City sales taxes and miscellaneous charges pertaining to the WWTP.
Sorry for my delay in getting this info to you.