Full faith and credit: Lyndon joins St. Matthews in proposing $10 million bond issue for Southern Baptist Theological Seminary
Lyndon’s city government is scheduled to hear a proposal on Monday, Aug. 27 on whether to issue bonds for the seminary, said Lyndon Mayor Susan Barto.
Barto said the city council has not voted on the project, “but we’ve been approached” by seminary officials to issue the bonds.
A classified notice for a public hearing spotted by our ever vigilant Steve Coomes states the hearing will concern the issuing of Kentucky Cultural and Educational Development Revenue Bonds, Series 2012. The bonds will generate $10 million that will go to the seminary on Lexington Road – which technically speaking is nowhere near Lyndon – to pay for expansion of seminary dorms and other infrastructure improvements.
If this sounds familiar, we reported last week that St. Matthews, which borders Lyndon, will have a meeting tonight at 6 p.m. to discuss issuing $10 million in bonds for the seminary.
Anna Domico, assistant to the senior vice president at Southern Baptist Theological Seminary, did not return Insider Louisville calls for comment. We also are waiting for state officials to explain exactly what Kentucky Cultural and Educational Development Revenue bonds are and how they work.
Asked why Lyndon, which is a small city within the metropolitan Louisville area, is risking its credit rating to issue bonds for the Baptist seminary, Barto said the city does not guarantee the bonds.
“That’s what we were told,” she said.
Which is unusual.
Bonds, unlike stocks, essentially are a loan to an entity, whether it be a corporation or a municipality, that has to be paid back with interest by a certain date. The rate of interest is a function of risk – the more risk, the higher the yield for investors and the lower the price of the bond.
Municipal and state bonds can be tax free and used to be considered a very low risk, guaranteed by entities that can, after all, raise taxes to cover their debt obligations.
That was until cities and states across the United States started running out of money at a time when raising taxes is politically suicidal.
Banking analyst Meredith Whitney infamously predicted in 2010 that 100 cities and counties will default on billions of dollars worth of municipal bonds, which, as you can imagine, dented the popularity of munis. Then, cities such as Birmingham, Ala. and Stockton and San Bernadino, Calif. did go broke.
Unless there is a Santa Claus bond we don’t know about, in the case of default, the bond issuer is going to pay one way or another, and the bond holder paid back.
All that said, there is a category of bonds called “conduit bonds” in which local or state governments essentially act as brokers – though not always as guarantors – for loans to private organizations such as hospitals to advance the public good.
Referring to the Municipal Securities Rulemaking Board (you probably have this bookmarked and memorized):
For most conduit bonds, although the governmental issuer of the bonds is legally obligated for repayment, that obligation usually is limited to the amounts of the loan repayments from the conduit borrower. If the conduit borrower fails to make loan repayments, the governmental issuer typically is not required to make up such shortfalls. Thus, unless the bond documents explicitly state otherwise, investors in conduit bonds should not view the governmental issuer as a guarantor on conduit bonds.
Which means this is going to be some expensive money.
Ultimately, the question becomes, will actual residents of Lyndon and St. Matthews step forward with ideas how the city might spend the money a little closer to home?
More as we know more.
Here’s the notice for the Lyndon meeting:
NOTICE OF PUBLIC HEARING OF CITY OF LYNDON, KENTUCKY WITH RESPECT TO THE ISSUANCE OF THE CITY OF LYNDON, KENTUCKY CULTURAL AND EDUCATIONAL DEVELOPMENT REVENUE BONDS, SERIES 2012 (THE SOUTHERN BAPTIST THEOLOGICAL SEMINARY PROJECT) The City of Lyndon will hold a public hearing on August 27, 2012 at 6:00 p.m., EDT, at the City Hall located at 515 Wood Road, Louisville Kentucky, concerning the issuance by the City of Lyndon, Kentucky of its Cultural and Educational Development Revenue Bonds, Series 2012 (The Southern Baptist Theological Seminary Project), currently estimated not to exceed the amount of $10,000,000 (the “Bonds”), pursuant to Section 103.200 to 103.285 of the Kentucky Revised Statutes, as amended. The net proceeds of the Bonds will be loaned to The Southern Baptist Theological Seminary, a Kentucky nonprofit corporation (“SBTS”) for the purpose of financing a portion of the costs of the renovation of Mullins Hall which will provide dormitory space for approximately 375 beds, lounges and recreation spaces as well as certain administrative programs entailing approximately 120,000 gross square feet and the renovation of Carver Hall which will provide a central hub for business administration on campus consisting of approximately 20,000 gross square feet that will be renovated and, finally, the creation of a new two lane road around the perimeter of the campus all located at 2825 Lexington Road, Louisville, Kentucky, to be owned by SBTS and to finance certain costs of issuance (the “Project”). THE BONDS SHALL NOT REPRESENT OR CONSTITUTE A DEBT OR PLEDGE OF THE FAITH AND CREDIT OR THE TAXING POWER OF THE CITY OF LYNDON OR THE COMMONWEALTH OF KENTUCKY. Interested persons are invited to attend this public hearing and will be given an opportunity to express their views and objections on the nature of the Project or the issuance of the Bonds. Written comments concerning the foregoing may be submitted to the following address: The City Council of the City of Lyndon Attention: City Clerk /s/ Stacy Woodward City Clerk City of Lyndon, Kentucky