A political dispute between the Secaucus, N.J., town council and a local authority over a recent bond refunding may damage the municipality's bond rating.
Recently, a majority of the town's six-member council refused to approve a $31 million refunding sold in October by the Secaucus Municipal Utilities Authority.
The members and their bond counsel, John Frohling, say the authority failed to disclose problems with a 1991 transaction that the new bonds are refunding. And the new issue is illegal because the agency issued the bonds without the council's approval, the members say.
The council may even withhold appropriation of debt service on the securities, said Dennis Elwell, the leader of the council faction against the refunding.
Authority officials, including chairman Richard J. Ricco, maintain that they did not need the council's approval to complete the deal and that the council is legally required to appropriate debt service on the agency's debt. Mayor Anthony Just, who appoints the authority's chairman, supports the refunding.
Bond raters at Moody's Investors Service are not taking sides, but executives there said any stalemate could damage the town's Aa bond rating.
"Legally, there's an obligation of the town to pay," said Paul Devine, a vice president at Moody's. "Any action of the council to hold bondholders hostage in a dispute with the authority would be detrimental to Secaucus' credit standing."
"Not living up to their budget obligations would be short-sighted and very damaging to the long-term credit," Devine said.
The town is rated AA-minus by Standard & Poor's Corp. A bond rater from Standard & Poor's could not be reached for comment.
The $31 million deal refunded all of the authority's debt, including a $3.9 million 1991 revenue bond issue that sparked a local debate over potential conflicts of interest and legal problems.
In a May 18 report, Frohling said the agency must disclose matters relating to this controversy in the refunding's official statement.
The report said, for example, that the authority's auditor, William Katchen, was not independent and had served both as accountant and auditor for the authority.
Joseph Ascione, a partner with Scarinci & Hollenbeck, the authority's counsel, said Frohling's concerns were "valid" at the time of the report's release. But, Ascione said, those concerns were addressed in the 1994 official statement completed in time for the October refunding.
"I don't see where the bondholders were at risk," Ascione said. "I had the impression this was more a political issue created by the opposition to the present mayor."
But town council member Elwell said many other disclosure issues remain, and that the agency failed to brief the council on the deal before it went to market, which led to the council's refusal to approve the deal. He said the council may sue the authority for its actions.
"They [the authority] basically said, 'If you don't like it sue us,'" Elwell said.
