GRAPSKI’S CON GAME OF HALF-TRUTHS AND LIES
Mr. Grapski seems to have a problem with the City of Alachua receiving an AAA rating for its latest bond issue. He states that the City is conning the public about that rating. He states that the City “purchased” it.
Like his arguments on what drives growth he shows his complete ignorance of how financial institutions work. Mr. Grapski says, “If you pay them enough to insure your bonds- that service provides you with a AAA bond rating guaranteed”. He wants to confuse you with the difference between Moody’s A3 rating and the insurance company, Ambac’s AAA rating. The truth is that you can’t buy that AAA rating, you earn it.
Financial institutions are driven by risk. The higher the risk, the more you pay. Conversely the lower the risk, the less you pay. This is the case for the City of Alachua.
Let’s walk through the recent process. The City needed financing for the new municipal complex. They decided to purchase bonds. They, like approximately 90% of other municipalities of its size, purchased bond insurance which would pay off the bonds if the City was not able to meet its debt obligations. Moody’s Investors Services conducted an independent analysis of the City’s financial stability. Based on their independent analysis they assigned an A3 underlying rating for the bonds based on the credit worthiness of the City. This is the highest credit rating a city can get. Based on this the City was able to get an insurance policy written by Ambac, an AAA rated insurance company at a lower premium. Based on Ambac’s AAA rated insurance they were able to get financing at a lower interest rate than if they sold the bonds uninsured (higher risk).
The City didn’t “purchase” that rating. Not every city that buys bond insurance gets an A3 credit rating. It was given to the city by Moody’s. Here is a news flash for Mr. Grapski, there is no guarantee that an insurance company will issue you a policy for any amount of money. Contrary to Mr. Grapski’s statement, you would not buy more insurance then the issuance of the bonds. You can’t pay higher premiums to get that rating. Just the opposite, you save on the premiums and interest by having that rating. If a city’s financial situation was bad the insurance company would decline to issue a policy because of the risk and the city would have to sell the bonds as uninsured (at a greater interest rate).
Mr. Grapski also states that the citizens paid “a cost, a hefty price” for the insurance. Once again he shows that he has no concept of good financial practices. As I stated before, Ambac issued the insurance policy based on the Moody A3 rating which resulted in the City receiving a lower premium and a lower interest rate. Just how much did that “hefty price(d)” insurance cost? The premium which covers P plus I for the thirty year bond costs 0.005% of the $7,245,000.00 bond ($14,316,017 total, P plus I), or $69,000.00. This resulted in the City saving at least two hundred thousand dollars over the life of the bond. That is sound fiscal policy.
Mr. Grapski states, “Thus the bond rating doesn’t reflect the City’s actual fiscal state of affairs”. Wrong again. The rating proves that the City is fiscally sound.
“Moody’s Investors Service has assigned an initial A3 underlying rating to the City of Alachua’s $8.69 million Capital Improvement Revenue Bonds, Series 2006. The bonds are secured by a covenant to budget and appropriate legally available non-ad valorem revenues in amounts sufficient to pay debt service on the bonds. The rating is predicated on the pledged revenues, which although also utilized for city essential operations, still affords satisfactory protection of debt service. The A3 underlying rating is also based on the steadily growing tax base; stable financial operations supported by a moderate tax rate (affording financial flexibility); satisfactory reserve levels; and a manageable debt position with limited borrowing plans but a slow principal retirement schedule”.
Mr. Grapski has a long history of denigrating Clovis Watson as incompetent as a City Manager. However, it has been under Mr. Watson’s leadership that the City has elevated its financial position to receive Moody’s rating and allow the City to lower its ad valorem tax rate to 5.5. As Moody’s has stated, the future of Alachua financial stability looks bright and we can expect further help for the citizens in the pocketbook where it counts. Mr. Grapski is very good at pointing fingers but has yet to make any meaningful suggestions to better the citizens at anywhere near the reality that the present City Manager and Commission have delivered.
Posted by Bud Calderwood