The Securities and Exchange Commission (SEC) is looking for cases where municipal governments use money from a bond offering for purposes not specified in the offering documents and cases where they move money reserved for specific purposes whether or not a bond issue is involved. The Wall Street Journal reported that “cities and states across the country are using money designated for specific purposes – such as fixing roads or sewers – in order to fill financial holes elsewhere, according to public officials and records. The moves are exposing municipalities to controversy, as federal regulators and local auditors are more heavily scrutinizing their finances to protect bond buyers and taxpayers.”
The article highlights Miami, where the SEC investigated whether the city used funds intended for roads and other purposes to fill budget gaps elsewhere. Bondholders are suing, saying the moves obscured the city’s true finances. Portland, Ore., over the past five years, used money raised for water and sewers for other purposes, but the city auditor reported that state law, city code and bond covenants require that utility ratepayer money be spent for utilities.
The legality and potential penalties of moving money around range widely from city to city, the report said. “Misusing money raised by publicly sold infrastructure bonds, for example, could violate civil laws protecting bond buyers. Other cases could violate federal or state public-finance disclosure laws, accounting rules, or regulations governing how agencies spend federal funds.”
The SEC is involved because “a municipal borrower that misleads investors in borrowing documents or uses money raised for other purposes could violate antifraud provisions,” theJournal said. “Municipalities deemed at higher risk of default typically pay higher interest rates on bonds. By obscuring financial problems, they may underpay bondholders.” While historically the SEC avoided financially penalizing municipalities (since taxpayers ultimately pay the penalty), last year the agency tried a new approach – it fined individual officials in San Diego to settle allegations the city had misled bond investors.
“Cities Hit as Funds From Bonds Pay Other Bills” appeared in The Wall Street JournalNovember 14, 2011.