(Nate “mydog” Freeman’s continuing quest for an audit, or some sort of accounting or accountability to pierce the mysterious, and uniquely peculiar veil of secrecy shrouding VSAC’s finances, all in light of questions that have arisen over similar operations across the country. We should all be asking at this point why the press seems completely uninterested… – promoted by odum)

Is VSAC to Vermont what Wall Street is to the Nation?

Testimony before the Senate Finance Committee:

H.166: A Bill Relating to VSAC

by Nate Freeman

Introduction

Thank you Senator Cummings, Senator McCormack, officers and members of the Finance Committee.

My name is Nate Freeman, I am a school board member in Northfield and I hold two appointed positions on the local level. My qualifications to speak on the subject of this bill come from prior experience as a financial professional. In 2005 I formed a fee-only RIA firm, Freeman Financial, LLC, through a rigorous BISHCA approval process. I hope the committee appreciates the value of knowledge I bring to the discussion today.

See H.166 testimony, after the flip.

H.166 is not an easy piece of legislation to decipher. One legislator referred to the bill as “legal and financial gobbledygook.” I think the majority of legislators might agree with this assessment since few have specialized knowledge in debt securities. Because the debt market is so arcane, legislators might pause to ask questions if only they knew what questions to ask. Given the financial crisis, asking the right questions about H.166 is more important than ever.

I am here today to help the Finance Committee ask timely and appropriate questions relating to VSAC's request for a $50 million moral obligation to enhance the lender's credit.

The questions I will offer come from heightened concern. When I read the news of VSAC's request for a $50 million moral obligation, I felt in my stomach the sinking dread many people have felt since the beginning of the financial crisis last September. The potential impact of H.166 is greater than legislators may currently realize. I have three areas of concern from which more questions will come.

1. Have guidelines for moral obligations limits been reviewed?

2. Has due diligence on VSAC's financial position been documented?

3. Is the General Assembly aware of breaking news of consequence in the variable rate municipal markets? 

I will cover each area by providing background information, followed by questions Vermonters should know as potential guarantors of VSAC's liabilities.

1. Have guidelines for moral obligations limits been reviewed?

From the bond analyst's view a moral obligation is referred to as “contingency debt.” Outstanding moral obligations sometimes factor into reviews of the State's bond rating. A September 2008 report to the Capital Debt Affordability Advisory Committee (CDAAC) recommends a policy approach to moral obligations and a procedure for setting limits to this kind of debt.

…it is relevant for CDAAC to consider a policy approach toward quantifying and limiting the State’s exposure to this type of debt. Indeed, without some form of containment, it is possible that an ever-increasing moral obligation debt load could, over time, erode the State’s debt position.

Recently, the CDAAC appears to have been working on guidelines to restrain growth in moral obligations. From the report:

There have been discussions within CDAAC for a couple of years regarding the establishment of guidelines for limiting the amount of moral obligation debt that the State should authorize. In an accompanying chart, the State’s net tax-supported debt statement, consisting entirely of the State’s GO outstanding indebtedness, is presented, as of June 30, 2008, at $438.6 million. Using 225% of GO debt for establishing a limit of moral obligation debt, the State would have had approximately $134.1 million in additional moral obligation capacity. Using 200% of GO debt for establishing a limit of moral obligation debt, the State would have had approximately $24.5 million in additional capacity. It should also be emphasized that the date during the year that these computations occur are crucial to the results. For example, if the computations had been made about a week later, July 8, 2008, after the VMBB, which has no statutory limit on moral obligation commitment from the State, sold an additional $43.57 million in new bonds, then the outstanding moral obligation commitment that the State had outstanding would have been approximately $895.3 million. Therefore, at 225%, there would be $90.5 million in additional capacity available; at 200%, there would ($19.1) million in negative capacity – in other words, at 200%, the State could not comply with the administrative guideline.

At this point, CDAAC believes that a range of 200-225% is appropriate in determining the amount of moral obligation commitments that should be outstanding in comparison to the State’s general obligation debt. Since CDAAC is not recommending legislative action to codify any statutory limits on the incurrence of moral obligation debt, CDAAC will continuously monitor the developing size of moral obligation commitments and report the results.

The State has had preliminary discussions with the rating agencies regarding this approach. As a general matter, the agencies are pleased that Vermont is attempting to restrain the potential growth in this area. For example, some states have adversely affected their debt positions by supplying over the years too much moral obligation commitment. At the same time, it does not appear that the rating agencies will give the State an approval of the precise percentage to be employed; indeed, the level of potential exposure will likely have to become a decision that the State will need to make, in consultation with its financial advisor.

 As of June 30, 2008, the sum of the State's outstanding moral obligations was $852.7 million.

Questions to ask with a request for supporting documents:

• What is the contingency debt position in outstanding moral obligations today?

• Has a policy approach been been applied in the case of H.166? 

• If CDAAC calculates a limits to moral obligations using the 200% to 225% formula, what is the remaining capacity for State moral obligations? 

• How does the State prioritize requests for moral obligations? 

• How will ratings agencies respond to a moral obligation for VSAC bonds as versus bonds from other State agencies? 

• If VSAC comes back to legislature sometime in the future equesting appropriations, what will happen to the good faith invested in other State moral obligations if the General Assembly does not fulfill the moral obligation granted to VSAC? 

• Is it legally possible for VSAC's creditors to demand payment from the State by virtue of moral obligation legislation?

  
  

2. Has due diligence on VSAC's financial position been documented?

• In mid-August, VSAC was paying $3 million annually for investment banking fees related to auction-rate securities.

• In mid-November VSAC still held $1.7 billion in failed ARS securities.

• On February 2^nd,, Moody's Investor's Services downgraded 31 classes of VSAC bonds from Prime 1 Aa3 to Prime 2 Baa1. The affected bonds represent higher risk to investors as well as a higher cost of capital for VSAC. The downgraded rating raises interest rates for VSAC. These interest rates are then passed on to borrowers.

   

• On February 4th, VSAC requests a State moral obligation.

• On February 13, Bloomberg reports VSAC's interest rates reset to 18%.

Yesterday, $27.5 million of federally taxable student loan debt issued by Vermont's Student Assistance Corp. and insured by Ambac Financial Group Inc. reset at 18 percent, up from 5 percent as of Jan. 15. Ambac was the first bond insurer to lose its AAA credit rating.

Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they modify the bonds to some other kind of variable-rate debt or a fixed interest rate. Bankers and borrowers have been working on conversion plans for several weeks.

Questions to ask with a request for supporting documents:

• How much risk is associated with a Baa1 rating? 

• How much capital has VSAC raised without a moral obligation since May? 

• What happens to the $1.7 billion failed ARS securities? 

• What interest rate will VSAC charge students for loans? 

• What does a snapshot of VSAC's financial revenue, assets and expenses look like today? 

• What does cash flow look like over the last 6 months? 

• How much does VSAC pay in investment banking fees and interest expenses at this time? 

• What is the risk assessment of a State moral obligation for VSAC? 

• Will a moral obligation backing VSAC's Baa1 rating be detrimental to Vermont's triple A rating? 

• If the State cannot determine adequate, material information regarding risk, should the General Assembly request an independent evaluation of internal finances and risk management at VSAC? 

   

3. Is the General Assembly aware of breaking news in the variable rate municipal markets?

The last twelve months have seen unprecedented events in the bond markets. Mundane liquidity markets have frozen. Bond insurers have requested bailout money and have been denied. As an issuer of bonds in the municipal market, VSAC should be aware of breaking news that is detrimental to lending capabilities. VSAC should be providing material information to legislators in full disclosure of risk associated with the request for a moral obligation.

Timeline of developing news

 

• February 3^rd. The Securities Industry and Financial Markets Association (SIFMA) sends letters to House Financial Services and Senate Banking requesting assistance in the municipal bond market.

  •  

    • SIFMA raises significant concerns about market liquidity and oversupply of bond offerings in the municipal market. 

    • SIFMA specifically mentions the impact to student lending authorities along with state and local governments.

       

• February 4^th. VSAC requests a $50 million moral obligation. 

• February 6^th. SIFMA sends versions of the same letters to Treasury Secretary Giethner and Fed Chair Bernanke. From SIFMA's letter:

The municipal bond market is experiencing a significantly low level of liquidity. State and local issuers are facing a critical need for reliable long-term credit enhancement, making it difficult to bring issues to market. The municipal securities market is also facing a serious dislocation between supply and demand. Municipalities are finding that even full faith and credit general obligation bonds cannot find investors. In some instances … cities and states have been forced to replace their variable rate municipal securities with more expensive, long-term, fixed-rate debt. … In other cases, municipal issuers have simply been unable to find buyers in the short and long-term markets for their debt issues.

The current conditions in the municipal market have severely limited the capital available to build roads, bridges, schools and other necessary infrastructure. We ask you to consider the following options to restore liquidity, adequately address the need for reliable long-term credit enhancement, and resolve the serious dislocation between supply and demand in the municipal bond market:

• February 10th. Treasury Secretary Giethner denies Ambac Assurance Corporation's request for capital infusion to prop up municipal bond underwriting. Ambac, VSAC's bond underwriter, had requested $1.5 billion. Bond issuers in municipal markets are unable to insure bond offerings. 

   

Questions to ask with a request for supporting documents:

• WasVSAC unaware of material information and breaking news in the bond markets? If so, why? 

• Has VSAC requested a need for a moral obligation to the General Assembly without providing material information? 

• Did VSAC purposely withhold material information. 

• How will VSAC raise capital given liquidity problems in the variable rate market? 

• What happens if VSAC cannot raise capital? 

• Does VSAC have a strategy to improve its bond rating? 

• What is the worst case scenario?

Conclusion

I would like to thank Senator Cummings, Senator McCormack and members of the Finance Committee for giving me this time to express my concerns. The kinds of questions I have provided should be asked so that the General Assembly can understand the issues that surround H.166. These questions, if asked and answered appropriately, will provide individual legislators enough information for an informed vote.

It has been implied by some that moral obligations are common, that historically none have been a cause of great concern. However, I have yet to hear anyone remind legislators what they most need to know: Past performance does not guarantee future results.

No two financial contracts are ever the same. We should remember that this is true of moral obligations. A moral $50 million obligation for VSAC cannot be compared to moral obligations the State has granted to VHFA, UVM, State colleges or VEDA. It is unwise to assume every moral obligation carries the same level of risk.

VSAC's request for a moral obligation comes from systemic problems in the global financial crisis. My interest in VSAC began in mid-November when I read a brief essay titled, “We are not an island; and VSAC is a sinking ship.” The overall message of the essay was clear: We cannot assume Vermont institutions will be insulated from the global financial crisis. We can't even assume that financial solutions that seemed to work six months ago are working right now.

This committee would do well to ask a question no one wants to ask: What happens in a worst case scenario? What happens if VSAC is stuck with $1.7 billion in auction rate securities it cannot sell? What happens if VSAC is unable to raise new capital in an illiquid market? What happens if student borrowers have to pay 18% or more for VSAC loans? What happens if VSAC defaults? What happens if VSAC comes to legislature requesting $50 million?

Considering the scale and reach of the global financial crisis, worst case scenario questions should be taken seriously. We are living in a time when there are no guarantees.

The unanswered questions of great concern to me as a Vermont taxpayer are those I raised at the beginning of testimony:

1. Have guidelines for moral obligations limits been reviewed?

2. Has due diligence on VSAC's financial position been documented?

3. Is the General Assembly aware of breaking news of consequence in the variable rate municipal markets?

Prudence requires due diligence before proceeding with a vote on H.166. It is my hope that this testimony will stimulate more discussion in the Senate than there was in the House. It is my hope that Senators will cast their votes fully informed of the risk associated with VSAC's request.

I believe that due diligence cannot be performed without an independent audit. Based on the research I have done since mid-November, I would not be surprised if an audit raises far more questions than I have asked today.

Once again, I would like to thank the Committee for this time today.

Nate Freeman

For several days the Times Argus has had up a poll on ENVY relicensing. For this length of time, the “yes-relicense” vote was about 33%. The “no-don’t relicense” vote was 50%-60%.

Until this morning.

About 1500 votes have been cast this AM, and it looks like they’re all ENVY votes.

What’s up? All the pro nuclers back at work today?

So I've been trying to figure out what to think about the Andy Montroll/Jonathan Leopold conflict of interest story. We are being told that it was definitely a conflict of interest, we're also being told that the Leopold story is definitely a hatchet job being pushed by Bob Kiss to hurt his political rival, but there is no definitive answer that I've seen.

In my work I regularly have to look into questions of legal ethics, and whether a conflict of interest exists, and each time I do I need to start with two main points: what are the actual facts, and what do the rules say? I find that it's too easy to start out with a vague idea of what's going on and conclude that there's something wrong, and it's only by reference to the rules that you'll really know.

The facts: As presented, the facts are that Andy Montroll sat on Burlington's Boardof Finance, with access to the financial records of Burlington Telecom, while also representing  Valley Net, a telecom provider doing business out of White River Junction, in a proceeding before the Public Service Board to obtain a certificate of public good to operate a cable television network. We don't know where Valley Net was planning on providing cable TV service,and there is no demonstration that Valley Net was a direct competitor with Burlington Telecom. Nevertheless, Leopold says confidential Burlington Telecom information should not have been provided to a potential competitor.

In addition:

Burlington Telecom General Manager Chris Burns said that because BT operates in a “very competitive space,” proprietary information about pricing strategies, “market strategies around bundling our services” and other business information was closely held.

“Honestly,” Burns said of Montroll’s work for Valley Net, “it makes me uncomfortable. Not knowing and not having control over the information is concerning.”

 And furthermore, the activities of Burlington Telecom have been an issue in the campaign: Montroll said recently in the campaign that Mayor Bob Kiss had been remiss in not working to expand Burlington Telecom’s reach to other communities.

The rules:  Here's what the Burlington Municipal Code says about conflicts of interest:

§ 133.  Conflicts of interest.

So, was Montroll doing anything wrong?

It isn't clear. The mere fact that he is on the Board of Finance while representing another cable or telecom company might not be enough to create a conflict. In fact, the comments of Chris Burns seem more based on hypothetical situations (“If referenced in another situation . . .”) and generalized discomfort at the lack of control over the information than anything else.

On the other hand, the code does says a city officer may not “participate or vote on any question in which such participation or vote would reasonably create in the mind of an objective person the appearance of a direct or indirect conflict of interest.” It's possible that while serving on the Board of Finance, Montroll had access to information and participated in discussions related to Burlington Telecom's budget or operations that might have been useful to any company looking to compete against Burlington Telecom. We don't know whether Valley Net was trying to compete against BT, given that they're located all the way across the state, but I've read suggestions that the real issue might have been VOIP, and a potential conflict betwen BT and VN in the Public Service Board on that issue. 

This still seems pretty nebulous to me, since I still haven't seen anything that indicates that BT and VN are really competing with each other, in the sense of trying to go after the same business, in which knowledge of one competitor's costs could be really useful to the other competitor. If anything, what seems more likely is that a case could be made out to show an appearance of a conflict, rather than any actual conflict.

 Leopold's action:  There is one troubling thing about how Leopold handled this.The ethics code tells a city official what to do when a conflict arises:

. . .  In the event a conflict of interest situation arises, the affected city officer shall at the first opportunity formally declare the existence of the conflict of interest situation.

Determination of a conflict of interest:

(b)   The proscribed appearance of a conflict of interest shall be deemed to be present when either the city officer formally announces the existence of such or two-thirds of the whole number of the city council . . . shall vote in a particular situation that such a conflict of interest situation exists for a particular city officer

In other words, if Montroll was in a conflict interest, it was his obligation to disclose it and recuse himself from further involvement in the matter in which the conflict exists. If he didn't disclose a conflict the council still has the authority to vote on whether a conflict exists, and make that determination, which would also have the effect of precluding him from dealing with the issue.

And what if he acted on a matter in which he has a conflict of interest?

(c)   Any city officer who violates the provisions of this section shall be regarded as guilty of bad conduct.  . . .  The mayor or a member of the city council shall be subject to official censure upon affirmative vote of two-thirds of the whole number of the city council with the mayor presiding and voting as a member thereof.

If he had a conflict and failed to recuse himself, he could be censured by a two-thirds vote of the Council.

 Under these rules, Jonathan Leopold clearly had the ability to talk to Andy Montroll, tell him that it appeared that he had a conflict of interest, and ask him to disclose the conflict to the City Council.

Failing that, the City Council had the power to examine the question without Montroll reporting it himself, and to vote on whether a conflict existed.

It appears that instead of either asking Montroll to disclose the conflict or asking the Council to vote on the existence of a conflict, Leopold called the Burlington Free Press. Now we learn in today's Free Prss that the Board of Finance will be taking the matter up this afternoon. If somebody (i.e. Leopold) has known about this since early this month, why did it have to be plastered all over the newspapers before being taken up by the appropriate public body?

I don't know if that makes it a smear, but it doesn't look good to me.

 By the way, GMD sent e-mails to both Andy Montroll and Jonathan Leopold seeking comments on this story, but to date has not heard from either of them.

(Updated with more details. – promoted by JulieWaters)

Per today’s Rutland Herald, a piece by Susan Smallheer brings up a couple inconvenient facts (emphasis mine):

A valve leaking more than 3,600 gallons of radioactive water a day at the Vermont Yankee nuclear power station, discovered seven weeks ago, still hasn’t been fixed, an Entergy Nuclear official said Monday.

[…]

The company announced the discovery of the leak in early January, saying the leak had been discovered two weeks earlier.

According to Neil Sheehan, spokesman for the Nuclear Regulatory Commission, Entergy has tried at least three times to fix the problem, traced to a faulty gasket in a valve in the reactor’s clean-out system.

Sheehan said the leak was now down to one-tenth of a gallon a minute, but he said he didn’t know how long the leak had been reduced. He said the water was “slightly radioactive.”

Sheehan said the gasket would have to be repaired, and Entergy Nuclear now had a spare valve on hand. He said the company could try to make some temporary repairs, or shut the plant down and quickly make the permanent repair.

Okay, so questions:

How long have they had the proper replacement gasket to fix this?

Why haven’t they done it already?

How long does it take to get a replacement gasket?

How cheap is our energy when it ends up polluting our rivers with radioactive waste?

And why do we have to keep asking questions like this?

UPDATE:

Another article by Smallheer, in today’s Rutland Herald:

Entergy Nuclear may have to shut down the Vermont Yankee nuclear plant to fix the persistent leak of radioactive water in the reactor’s clean-out system.

Robert Williams, spokesman for Entergy Nuclear, said Tuesday plant engineers, along with specialists hired by the company, would be talking about the valve leak later this week to discuss another approach to solving the problem.

Shutting the reactor down to fix the problem “is always an option,” he said.

Well, that’s good to know, as long as they’re keeping their options open.  

My favorite part, though, is Williams saying that it’s difficult to pinpoint exactly how much water was leaking.  Nice.

Euan referenced it below, but the first real public exchange of the 2010 Governor’s race may have just played out last week, and it had enough resonance that reverberations have continued as recently as this morning from the traditional media. From Dillon:

(Host) Racine announced in early January that he would run for governor in two years. And the governor said last week that Vermonters would think it was – quote – “perverse” for candidates to announce so early.

But Racine said that in the last several campaign cycles Douglas has raised and spent tens of thousands of dollars early in his term.

(Racine) “So it’s somewhat disingenuous for the governor to be suggesting that others who might be interested in running cannot engage in the same sort of activity that he’s engaged in consistently over the years.”

Heh.

Douglas was badly staggered last week as the public hit he took over Lake Champlain seemed to knock him off his stride, causing the policy blindside from Democratic leaders to go largely unanswered, and finally shaking him enough to make this stupid “perverse” comment and give one his most dangerous potential opponents (one who would have beat him at their last contest if not for the presence of a third significant candidate) an opportunity. And it was an opportunity not simply to pull in some solid earned media, but exactly the kind of earned media he (Racine) needs to address the concerns about whether or not he could bring to a rematch the kind of scrappiness Dems are hoping to see from their candidate.