Main St. feeling squeeze

Financial market turmoil having effect on local government borrowing

In Charleston, the credit crisis is prompting city government to delay the purchase of an $18 million parking garage.

Across the state, York County postponed a $45 million bond issue to pay for fire stations and a jail expansion.

And when Rock Hill went to issue bonds two weeks ago, administrator David Vehaun personally contacted at least a dozen banks, something he'd never done before. Then, the city received just one bid.

"It's not like we're asking for free money here," Vehaun said. "This is pretty secure debt, and they're going to charge us interest."

Local governments and schools rely on borrowed money to finance big projects, and some use short-term debt to tide them over until tax payments arrive.

Municipal debt is typically backed by government taxing authority and has traditionally been considered a safe investment by lenders. But the credit crisis has changed the rules.

With banks hesitant to make loans, some local governments and schools are delaying purchases, and others could face higher interest rates that will be passed along to taxpayers.

"It's a weird time, and uncertainty makes people cling to cash," said Brent Jeffcoat, a Charlotte bond attorney who works with South Carolina school districts. "It's no longer good enough to be about as safe as safe gets."

The Charleston School District had planned to sell $42 million in debt two weeks ago but delayed the offering as the federal government debated a $700 billion national financial rescue package. With the bailout still unsettled, the district sold its debt last Wednesday.

Michael Bobby, chief financial and operations officer for the district, said the interest rate the district was able to get on the roughly 6-month loan was 2.48 percent. That's a bit less than the district expected to pay, but nearly a full percentage point higher than the rate on a different borrowing earlier this year.

In Rock Hill, where there was one bidder on the city's $14 million short-term debt, Vehaun said the city was fortunate to get a 3.78 percent interest rate.

Some governments have escaped the credit crisis issues because they have no need to borrow money right now. The Charleston Water System and Charleston County, for example, have no plans to issue bonds this year.

"I would hate to be in the position of having to borrow money right now," said Keith Bustraan, Charleston County's chief financial officer.

Charlton deSaussure, who serves as bond attorney for many municipal governments in South Carolina and is the city of Charleston's lead attorney, said local governments that do need to borrow are taking a "wait and see" approach and hoping things will get better.

"It's not dire here because a lot of our local governments have reserve funds," he said. "It can be dire if you're on the edge, if you don't have money for payroll and don't have access to the credit market."

The York County bond issue was one deSaussure worked on, and he said the county decided to wait after concluding that higher interest rates would add $450,000 a year to the debt.

As with a conventional mortgage, higher interest rates on bonds mean the government faces costlier payments.

Steve Bedard, Charleston's chief financial officer, said the city was planning to issue bonds and purchase a parking garage at George and St. Philip streets, which the city has been leasing. Now, officials might wait until January and see what happens with interest rates.

"I would think that by January things will have settled down to where they are going to settle to," Bedard said.

Reach David Slade at 937-5552 or dslade@postandcourier.com.