New Accounting Rule Could Damage NorCo Bond Rating

Earlier this month, Northampton County's General Purpose Authority (GPA) canceled a meeting at which its outside auditor was expected to present the Financial Statements. Board Chair Shawn Langen, who appears to make a lot of GPA decisions unilaterally, took it upon himself to make this call. As a result, Northampton County is now late in releasing its own financial statements. It is important to note that there are no hints of any kind of financial irregularity. Moreover, Fiscal Affairs Director Steve Barron has told me that this tardiness should have no negative consequences. So why is he upset? It's because of a new accounting rule hoing into effect on June 15.  It is now going to require municipalities to provide details about private debt that never existed before. NorCo's P3 agreement involving the GPA and private contractor Kriger Construction could reduce the county's credit rating. The same is true of municipalities that take out bank loans or lines of credit.

The new rule is called GASB 88. It goes into effect June 15. As explained in Governing, "The new rule requires governments to include in their annual reports a statement called GASB 88 that will include not just the amount of money borrowed directly from banks but any unused lines of credit, any public assets pledged as collateral and any terms laid out in the lending agreement that could trigger early payment or financial penalties."

Private debt has become a very popular alternative to bond issues for municipalities and schools. Generally, it is cheaper and a lot less cumbersome. An added plus, according to economist Ramonma Dagostino, is that every million in municipal debt to private banks results in 30 additional private sector jobs.  It's no surprise, therefore, that direct municipal loans from banks nearly doubled after the Great Recession, from $225 billion in 2009 to $425 billion in 2014 

There are also dangers. Almost all loans provide that a missed payment is a default, triggering an acceleration clause that will require immediate repayment in full. Most of the loan agreements provide that any missed payment to any lender will trigger an acceleration clause. Some even contain language defining a default as a downgrade in credit status.

GASB 88 makes no attempt to ban this private debt, but does requires more transparency. Lease rental debt is excluded, but the $38 million debt to Kriger must be identified. In addition, the county must note the provisions that could trigger additional penalties or a default. This financing scheme could end up hurting the County's bond rating.