Hidden fees date back a decade
The Tennessean
June 28, 2009 Sunday
SECTION: NEWS
LENGTH: 898 words
HEADLINE: Hidden fees date back a decade
BY Brad Schrade
The Tennessean
The Tennessee Municipal Bond Fund appears to have been charging hundreds of thousands of dollars in hidden fees to local governments over the past decade, according to an investigation by The Tennessean.
Some of the charges first came to light last month when the newspaper reported the bond fund charged approximately $400,000 in hidden fees this year to Nashville, Murfreesboro and nearly 150 other local governments across the state.
Bond fund President/CEO Charles G. "Bones" Seivers acknowledged in an interview in late April that the fund had made similar charges on variable-rate loans in the past, but didn't give specifics, other than to say the fee was placed in the interest rate from time to time to help pay money owed the IRS. The fund
has said the vast majority
of the charges were allowable under its loan agreements.
The extent of the charges is unclear, but a review of invoices sent by the bond fund's trustee to Murfreesboro, one of the fund's most frequent customers, on loans starting in 1994 suggests the pattern goes back at least 10 years. The city has approximately $300 million in variable-rate loans with the bond fund.
Starting in 1998, interest rates regularly do not match up on some invoices with the bond fund's variable rates reported to the market. The rates charged to the city are higher than the actual rate reported to the market.
Murfreesboro Mayor Tommy Bragg said he was unaware of any discrepancy in historical rates, but he said he believes that if there was a problem, the bond fund would let the city know. Longtime Murfreesboro City Manager Roger Haley has been on the bond fund's board for years.
"We've had a good relationship with the bond fund," Bragg said. "I believe overall they've saved us a considerable amount."
Invoices dated 2005 show that the city of Pulaski had discrepancies on a 1997 loan pool that was similar to the pattern in Murfreesboro. Pulaski was also charged the hidden fees this year.
"I was not aware and my city administrator was not aware we were being charged a fee," said Pulaski Mayor Dan Speer, a bond fund board member in the late 1990s and a former president of the Tennessee Municipal League, which created the bond fund. "From what I've read in the paper and the reactions, it doesn't look good whether it's legal or not. It's disappointing news. I had a lot of faith in the bond fund."
A culture of secrecy
Seivers has refused repeated requests for an interview since The Tennessean published a story May 10 about the hidden fees and other issues with the fund's operation. The fees fit into the fund's broader culture of secrecy and lack of disclosure.
In a previous interview, he said the hidden fees were charged to generate money to rebate to the Internal Revenue Service for investment income made from proceeds on tax-exempt bonds.
He had no clear explanation as to why the fees were obscured in the interest rate and not itemized.
"It's no reason for it," Seivers said. "It's just a place to put it without having another line item."
Seivers, in a written response Friday to the rate discrepancies in Murfreesboro, said, "While your findings are evidence of a problem regarding the presentation of the invoices, it is not necessarily indicative of an overcharge to the borrower."
He added that the problem with the invoices had been identified in an audit by its longtime auditor, Pugh & Co. of Knoxville, which was prompted after the first discrepancies came to light.
The auditor's report released earlier this month at a bond fund board meeting does not directly address the hidden fees. The report says most of the fees charged by the bond fund by local governments were allowed under the bond fund's agreements with them.
The auditor makes several recommendations, including making the invoices easier to understand and giving written notice to local governments in the future when administrative fees are changed. The bond fund board adopted the recommendations. The report, which reviewed transactions dating to 2004, does not give in its findings an accounting of the interest rate discrepancies.
Seivers noted in his letter that the audit revealed errors resulting in 35 cities or counties paying $44,993.86 that they should not have paid, and said that these local governments have been reimbursed. He said the errors were "clearly unintentional."
Issues still unaddressed
State Comptroller Justin Wilson's office received a copy of the report, but he said it's far from comprehensive.
"It doesn't address a lot of issues and I don't know if that was in the scope of the inquiry or not, but it doesn't deal with a lot of issues I'm concerned about," Wilson said.
Asked about those concerns, Wilson said "such as the disclosure of all the costs a municipality should pay and itemization."
Wilson did not rule out the possibility of an audit by the comptroller's office, although he said there are no plans for such a review.
In the case of Metro, it received a letter in May saying it had been overcharged $17,253 on the fees from a $59 million loan made in December. It later received indication that the overcharge was $20,493.
Mayor Karl Dean, who is on the Tennessee Municipal League board, said he favors clarity and disclosure.
"I think there should be transparency and openness," Dean said. "Everything should be on the table."
Brad Schrade can be reached at
615-259-8086 or bschrade@tennessean.com
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