The MAMU bond laundry… down the rabbit hole.
Roughly, this is how they work the system as tax-free municipal utility revenue bonds are laundered into lease-purchase loans with hidden interest-rate swaps:
Step 1.) MAMU rounds up members who are planning* to do utility capital improvements and who will pay any amount of money to take advantage of MAMU’s magic trick - avoiding the risk of submitting their plans to voters as required in Article VI, Section 27(a) of the Missouri Constitution. MAMU then drives their flock to MDFB, the “conduit issuer,” where they fill out a few skimpy forms to get in on the next MDFB pool bond issue. According to MDFB’s 2007 state audit it’s clear that MDFB is none too particular about how the questions are answered.
(*In some cases they weren’t planning any capital projects they got pushed into it. When they signed their MoPEP contract one of Kincheloe’s great business ideas was that they would all buy diesel generators and become a generator farm and produce their own electricity with the most expensive fuel on the market. Kincheloe loaned them the money to buy the generators through MAMU. The generators are mostly gathering dust now because now Kincheloe doesn’t want to ‘buy’ any of their diesel generated electricity because if he buys it he has to give MoPEP members “MoPEP credits” for producing diesel kilowatts that cost 20-100 times the market rate per kWh. It’s getting hard to tell who is swindling whom here.)
Step 2.) Once the MDFB has a large enough flock of money-hungry sheep in the shearing pen, they issue a single pooled tax-free municipal revenue bond issue to fund all the applicants. Tax-free municipal bonds almost sell themselves, tax-free utility revenue bonds are nearly the same – it’s the tax-free part that makes them so good. They are prized in the market so the interest rates are usually lower than plain revenue bonds. Because they are desirable as an investment and big brokerage houses that do the bond underwriting need tax-free munis to service their biggest clients who always need tax-free investments, the servicing fees are negotiable but the little towns aren’t told that, they don’t know that with their tax-free municipal bonds they have leverage to get the lowest fees. They’re told it will be difficult to unload their bonds so a lot of people will have to be paid a lot of money to process and sell their bonds mostly based on a percentage of the loan. This is just bunk.
No proof that MDFB’s fees are cheaper. In Rolla’s case A.G. Edwards/Wachovia have been the underwriters for at least three MDFB-MAMU pool bonds over a period of the last five to eight years that we know of and we suspect Wachovia has been the chief underwriter in a lot more of MDFB’s financings. It would have been useful if the state auditor had checked to see if the MDFB and MAMU were competitively bidding MDFB’s lucrative bond “servicing” deals for all these pooled bonds as they are required to do but it doesn’t appear that the auditor checked that either. The result is that additional fees hidden in the body of the boilerplate – which can’t be found except by diligent plowing though 60 or 80 pages of legalese (that’s why they call it “due diligence”) - may add up to three or four times more than the commercial service fees would have been had the cities done the bonds on their own. Everyone assumes that the fees charged by the MDFB are less than from a competitively bid commercial company. Everyone assumes this because it’s what MDFB and MAMU tell them. But if the MDFB can’t prove they are providing cheaper fees for these financing issues than the commercial market is charging, and if their loan approval process is so superficial or so politically driven that a recent loan defaulted just months after they approved it, then, do the taxpayers of Missouri really need the Missouri Development Finance Board?
At this point the bonds have been issued, sold and the towns have the bond money they need for their projects. They could have stopped the process right here and do what all public entities used to do and what the well-managed ones still do - take a nice low fixed-rate of interest on their bonds, build their projects and pay back a fixed-rate loan with a steady predictable amount of P&I for the next 20 years, but that’s not what happens at MDFB anymore especially not since the Governor, the Lt. Governor and eight of their political friends hooked up with Duncan Kincheloe and his MAMU “Payday Loan Company.”
Step 3.) Each city’s revenue bonds are now rolled over into so-called “lease-purchase” contracts (a lease-purchase is just a short-term loan pretending to be a yearly renewable lease) between MAMU and each town that had a share of the pool bond funding. Each city is now not only paying the MDFB their proportional share of the bond pool servicing fees but they’re each handing over their bond proceeds to MAMU so MAMU can rent their own bond money back to them as a lease-purchase contract so MAMU can take a fee based on a percentage of the declining balance for the next 30 years! If you’re not already choking - read that again. The cities are paying MAMU an annual fee of 1.5% on the unpaid balance of the bonds for the next three decades to rent their own money from MAMU, another Kincheloe financing middleman. If you still find it hard to believe let’s try it another way. You can tell that by looking at MAMU’s audits that they do not have the cash to make a loan for lunch much less these multi-million dollar lease-purchase loans. So where does MAMU get the multi-millions they “loan” cities for lease purchase loans? The cities give MAMU the millions they just borrowed from MDFB so MAMU can loan or lease-purchase the millions back to them. If it makes your brain hurt, take an aspirin because from here it just gets worse.
If you think that’s just ridiculous you’re right but all swindles look ridiculous when taken apart. Kincheloe’s ‘hook’ is that his member cities are more than willing to pay MAMU 1.5% interest on the unpaid balance of the debt for the next 30 years of this high-risk adjustable interest rate on their bond debt and they’ll play any kind of absurd ring-around-the-rosy because they’re desperate to avoid letting the voters speak their minds in a referendum. Kincheloe has them convinced his “Program” provides them with the legal cover to do this. He can’t prove it of course, he just tells them it will work and they believe him - cult members never question their prophets. Do the cities care how much extra costs and fees they are paying to avoid public accountability? Probably not because their utility rate payers will pay those costs along with all the others so what do they care? If there is anything Duncan Kincheloe is good at it’s setting up straw corporations like MoPEP and MAMU to shuffle paper for the purpose of collecting money from the gullible for the benefit of the conniving.
The “tax-free” bond fingerprint. One of the smoke screens they will try to throw up is that the revenue bonds belong to MDFB not the cities. Wrong. A tax-free municipal bond, is one issued by a municipal, county or state government, whose interest payments are not subject to federal income tax, and sometimes also state or local income tax. There is no doubt that this bond money belongs to the cities, not to MDFB. The bonds describe MDFB as the “conduit issuer” of the bonds not the “owner” of the bonds. The tax-exempt status of the bonds is unique and can only derive from being an issue of the cities and towns that own the bonds no matter what misleading names they call the overarching financial issue such as, “Lease-Revenue Bonds” or “Commercial Paper.” If they’re tax-exempt bonds they are municipal bonds. The minute they ceased being the bonds of some qualified municipality they would cease to be “tax-free.”
The excuse, that this unnecessarily expensive, tortuous system of laundering utility revenue bonds into 30-year lease-purchase contracts (which conveniently gives MAMU decades of 1.5% income for doing minimal paperwork) voids the constitutional requirement for a referendum vote because the bonds have been laundered into lease-revenue contracts, won’t hold up to a legal challenge. Lease-purchase contracts and “commercial paper” by themselves cannot be tax-free. Only municipal bonds can be tax-free and these are tax-free municipal bonds. Neither new name on the cover page can cover up the fact that the original funding underlying the lease-purchase contract is still in tax-free municipal utility bonds no matter how many laundries they run them through or how many alias’ they give them. No matter what cosmetics they use to try to disguise the original tax-free municipal bonds they began as and they remain, tax-free municipal bonds issued to each city. The proof is that each of these so-called “Commercial Paper” or “Lease Revenue Notes” contains “Opinion of Bond Counsel” letters and the documents repeatedly refer to the underlying tax-free muni bonds that are being exploited to leverage debt to gamble in the interest-rate swap market.
Kincheloe’s loophole has a loophole. In the MAMU bid to Rolla on May 16, 2008, Kincheloe describes this shell game of laundering bonds into lease-purchase contracts and he explains that it is done to avoid the constitutional requirement for a referendum vote of approval by the folks at home. “The program does not require lease-purchase participants to fund a Debt Service Reserve and no voter referendum is required.” Even if anyone told the several city council’s that they were paying double fees and might soon pay even more in swap penalties to use the “Kincheloe loophole” they wouldn’t care. They are obviously willing to spend any amount of the public’s money to keep the public from voting on what they want to do and quite likely spoiling their plans to do it. If a citizen happened to ask why they weren’t taking a referendum vote first as prescribed in Article VI, Section 27(a) of the Missouri Constitution (such a question would be asked right after pigs fly) they can tell the home town folks that it’s just a lease-purchase contract with MAMU not really a utility revenue bond issue which must have a referendum vote. There’s only one thing wrong with Kincheloe’s bond laundry…the revenue bonds had already been issued to the cities by MDFB before the bond proceeds were handed over to MAMU to be camouflaged as lease-purchase contracts. Before MDFB put their names in the bond pool they should have received a certificate of the results of the referendum vote in each pool city that was held by the folks back home. Oops! Why were the Lt. Governor and the eight FOG’s (Friends Of the Governor) willing to overlook this critical piece of paper – the Certificate of Election Results – proof that there had been a home town referendum BEFORE the MDFB issued the bond proceeds in the city’s name and sent the bonds on to the MAMU lease-purchase laundry? Why were they so eager to help generate cash so MAMU and Wachovia could invest in the auction-rate securities market?
If any city had asked to see the full scope of the loan paperwork (which they never do because they don’t know there is anything else but the few papers they’re being force fed) and if they had read every page of it (which they wouldn’t, reading being another thing that will only happen after pigs fly) they would have discovered, as we did, that the interest payments from the bonds, d.b.a. the lease-purchase contract, were being sent on to other financial agents each of whom would charge the city another percentage for using their money in a financial contrivance they knew nothing about. The ‘other’ financial agents also charge fees. At one point in the latest Rolla-MAMU contract there are no less than 13 different “funds” that will be set up with a different beneficiary attached to each fund and none of the beneficiaries were the City of Rolla. Blissful in their ignorance, the Rolla City council think they are getting a fixed rate of interest that will not exceed 5% (the fixed rate only lasts three years, then it coverts to a floating rate) and they think they’ve gotten a real cheap deal on the fees by going through MDFB-MAMU for their money. Why do they think that? Because Kincheloe said so and so did Dan Watkins, the guy who runs their utility department. Dan said it was a good deal and they “trust the experts.” After all who would know more about complex Wall Street financing deals than a guy who can climb a utility pole?
Why we must vote on utility revenue bonds but not other types of revenue bonds. The state limits every public entity to a certain percentage of debt - a percentage based on the total assessed real estate valuation of the district - that’s their “debt ceiling.” But the state only counts General Obligation bonds – the ones people vote on and pay off on their property taxes – in that debt ceiling calculation. Revenue bonds are exempt from that debt limit total so that’s why cities like to use revenue bonds instead of GO bonds. Revenue bond debt is kind of off-the-radar, almost secret debt. However, one type of revenue bond debt is different – it’s revenue bonds for utility projects. The courts decided this because revenue bonds for utility projects are repaid by the utility users in their utility rates and fees so they work almost the same as G.O. bonds – repayment is a direct financial obligation of the voters in both G.O. bonds and utility revenue bonds. If the majority of citizens vote for a utility revenue bond to build a new sewer system their sewer user rates will go up by whatever amount necessary and for whatever number of years necessary to pay off the utility revenue bonds. That’s okay because voters agreed, when they went to the polls to vote on the bond issue, to pay the increased fees as stated on the ballot – they knew what the deal was going in. However, if, by use of the alleged loophole claimed by the MDFB-MAMU “bond laundry,” the city can pile up unlimited amounts of utility revenue bond debts that the public will be forced to pay off in their utility rates but which, because of this MAMU trickery, they never get to vote on, then any irresponsible bunch of elected and official fools can abuse this loophole repeatedly and run up a crushing burden of debt that the town and residents cannot survive.
In the unlikely event that the ‘MAMU loophole’ were challenged and upheld by the court then citizens would forever be denied their constitutional right to vote on revenue bonds for utility issues i.e. taxation without representation. The people would be helpless to stop reckless officials from ruining their community’s financial condition. Such a court decision would also put utility rate increases beyond reach of the Hancock Amendment. Voiding two constitutional amendments at one blow by use of his ‘revenue bond laundry’ is beyond even Duncan Kincheloe’s powers. In the entire legal history of Missouri the record of decisions issued by the Missouri Supreme Court and the several Missouri Appellate courts says that if they were asked the question today, “Can a utility revenue bond issue be disguised as a lease-purchase contract to avoid compliance with Art. VI, Sec. 27(a)?” their answer would be a firm “no” because it has never been their habit to take a cavalier attitude toward the financial fortunes and security of the communities of this state and the constitutional rights of its people. (continued….)
