Borrowing time: Exploring Asheville, Buncombe bond issues

As the city of Asheville and Buncombe County prepare to weather the impacts of COVID-19, the disease caused by the new coronavirus, their finance departments are managing to find a silver lining amid the state of emergency. Health care workers may be stressed, public events may be postponed until further notice, but the price of money is looking better than it has in years.

“With various things like the coronavirus and other concerns about how that’s going to impact the economy, what’s happened is interest rates have actually come down,” says Doug Whitman, treasurer for the city of Asheville. On March 15, the U.S. Federal Reserve cut the federal funds rate, a key financial benchmark, to 0 to 0.25%, its lowest level since December 2008.

That’s fortuitous timing for local governments. Over the 30-day period that began Feb. 27 and runs through March 26, the city and county are planning to issue a total of nearly $233 million in debt.

In times of trouble for the stock market — as of press time, the Dow Jones Industrial Average had experienced its three largest single-day point losses in history on March 9, 12 and 16 and is currently in bear territory — investors traditionally turn toward government-issued bonds, which are considered much safer investments. And when demand for that security is high, cities and counties pay less to borrow money, which they can then use to refinance old debt or fund new projects.

How much less? In 2000, when Asheville last issued general obligation bonds, the city paid around 5% annually to borrow money for five years. For one set of bonds sold in February, the city is paying an effective interest rate of just 1% to borrow money for 10 years, or a fifth as much interest for a loan twice as long. Buncombe County estimates that it can save taxpayers $20.5 million on interest over the next 15 years by refinancing previously issued debt.

But both the city and county claim another factor contributes to their favorably low interest rates: a AAA credit rating. Asheville Chief Financial Officer Barbara Whitehorn explains that this mark, awarded by rating agencies such as Standard & Poor’s and Moody’s, signifies the greatest possible expert confidence in the safety of holding a government’s debt.

“They’re basically saying to an investor, ‘If you buy these bonds that are 20 years out from now, we give you the highest level of assurance that we can that you will get that money back,’” Whitehorn says. “It’s really a big deal.”

With so much funding set to flow into local coffers, Xpress looked at what goes into a AAA credit rating — and what impact maintaining that rating has on Asheville and Buncombe County’s approaches to money management.

Views of the top

In recent years, both the city and county have been keen to be recognized as prudent stewards, and both governments have pointed to their credit ratings as evidence. When Buncombe first earned its AAA in 2012, then-County Manager Wanda Greene stated in a press release that the rating affirmed the county’s ability “to support our business community, to provide effective and efficient services and conservatively manage our tax dollars.” A 2017 release following Asheville’s own upgrade to AAA called the move “confirmation of the city’s sound fiscal policies and professional management.”

(In August, Greene was convicted of federal corruption charges and sentenced to seven years in prison. Federal indictments of the former county manager outlined fraudulent financial activities including improper purchase card use and channeling $2.3 million of taxpayer money earmarked for a lawsuit settlement to purchase life insurance policies for herself and other county employees.)

Don Warn, Buncombe County’s finance director since November 2018, explains that 30% of a government’s credit rating is derived from the health of its economy, which determines its available tax base. Buncombe County, with its ever-expanding tourism industry and rapid pace of construction, scores particularly well on that front.

The remainder of the rating, Warn continues, is based on the government’s own actions. Lower levels of overall debt, higher cash reserves, greater budgeting oversight and more detailed financial policies, he says, all play a role in a rating agency’s decision.

“The better your rating is, it just says we’re doing the right things,” Warn says. “You can’t have a AAA rating without having strong management, strong fund balance, strong financials, strong economy.”

Experts outside of government, however, generally take a more limited interpretation. Matt Fabian, a partner with Massachusetts-based research firm Municipal Market Analytics, says that the financial industry regards government credit ratings exactly like personal credit scores — no more, no less.

“A lot of cities use the credit rating as a proxy for some sort of seal of approval that they’re doing things correctly or that they are running the government in an appropriate way,” Fabian says. “But that’s not exactly true, in the same way that running your life just to maximize a credit score is maybe not an appropriate thing for all people to do.”

First rate?

Governments with a AAA credit rating, acknowledges Fabian, do get the lowest possible interest rates when borrowing money. Yet due to unusually high demand in the municipal debt market — “The formal term is ‘bananas’: For every potential borrower, there are 20 lenders,” he says — the benefit of a AAA compared to a slightly lower rating can be as little as a tenth of a percentage point on a 30-year bond.

Meanwhile, Fabian argues, maintaining the highest rating can come at an opportunity cost. In search of the coveted AAA, he says, administrations may curb spending on essential services such as education to build up cash reserves. They’re also less likely to take on debt for infrastructure projects and may institute extra layers of financial oversight that yield diminishing returns.

“If you’re working hard, not spending your money, and your kids are going hungry because you want to get that higher credit score, well, maybe your priorities are not correctly aligned,” Fabian says. Although some governments “can’t help but be AAA” due to their strong economies, he continues, “Getting a AAA rating for its own sake is almost never worth it from a governing perspective.”

Whitehorn says that the highest rating still makes sense for Asheville. While the financial boost is less than it would be in other times, she estimates that the city will save roughly $450,000 in interest over 20 years on the nearly $21 million in bonds it recently issued by having a AAA rating compared to the next-highest AA+ or Aa1 rating.

The city’s approach to cash reserves, Whitehorn adds, has benefits beyond contributing to a high credit score. North Carolina’s Local Government Commission, an oversight agency that must sign off on all municipal bonds in the state, issues warning letters to governments that do not keep at least 8% of their annual general fund income as unassigned fund balance; Asheville’s policy is to keep a reserve of at least 15%, and the balance currently sits at around 18%, or approximately $24 million for fiscal year 2019-20.

“If we were to have a major disaster that brought down some critical city operation and we weren’t bringing in our normal revenue, we would have that nest egg, if you will, to take care of operations,” Whitehorn says. “We could still do all of the things we need to do on a day-to-day basis until we could get operations back up and running.”

Warn notes that Buncombe County shares a similar philosophy regarding its general fund reserves, which are also recommended by policy to remain above 15% (roughly $48 million in the current fiscal year). “In the event that the bottom falls out and we have a major recession, we still want to be able to offer services,” he says. “That’s what you have a healthy fund balance for; it’s not just for credit ratings.”

Loan arrangers

Buncombe and Asheville leaders both say that debt plays a key role in spreading out the cost of projects, allowing them to spend manageable amounts of money in any given fiscal year. As time goes on, both governments hope to continue regular bond-issuing programs to meet ongoing capital needs.

Warn estimates that the county will issue at least $17 million of debt per year into the foreseeable future to cover capital projects for Buncombe County Schools alone. Bond amounts for other government projects, he says, will depend on needs identified by a new facility study for which the county is currently evaluating 11 potential contractors.

Asheville is still issuing bonds for the $74 million in debt authorized by voters in 2016, but Whitehorn emphasizes that more money is necessary to cover approximately $330 million in capital projects requested by city departments through fiscal year 2024. In a City Council budget session last April, she advocated that the city institute regular bond issues to fund those needs.

“We need a program that has recurring bonds to really get to a financially sustainable place and a place where we can get streets and sidewalks being resurfaced often enough,” Whitehorn says about Asheville’s current situation. “But we also have to be cognizant of the impact on taxpayers, and that’s a policy decision for Council to determine.”