BOSTON -- The city of Chelsea, Mass., is coming to market.
Three years ago, if someone in the municipal industry had uttered those words, he or she would probably have been laughed right out of the trading room.
But tomorrow morning, Chelsea plans to sell its first general obligation issue since 1982. The city has no outstanding general obligation debt.
Participants in the financing stud last week that the terms and structure of the issue are an important step in the overall recovery of a city long considered to be one of the weakest in Massachusetts.
Chelsea expects to sell $111 million of COs tomorrow to be used to renovate the city's dilapidated school system. The financing is expected to include serial bonds maturing in 1995 through 2009 and a term bond maturing in 2014. The bonds will be insured by AMBAC Indemnity Corp. and will be rated triple A. Lehman Brothers will act as the senior manager, and J.D. Blair & Co. and Government Finance Group will serve as financial advisers for the city.
Bond insurance is just one of several methods that Chelsea and its financial advisers are using to convince investors to buy bonds from a city that only three years ago could not pay its bills.
Under Massachusetts' School Building Assistance Act of 1948, 95% of the cost of improving the city's schools will be reimbursed by the state. Since the act was passed, Chelsea has been the only town in the state that has not availed itself of the program.
In fact, the newest of Chelsea's five schools was built in 1909. And since 1989, the entire school system has been managed by Boston University after a study showed that only an independent entity could fight the system's wrongs.
The problems experienced by the city's school system -- namely mismanagement, corruption, and occasionally criminal neglect -- were not limited to the schools.
In 1991, Gov. William F. Weld appointed a receiver to serve as the financial czar of the city because Chelsea could neither pay its bills nor balance its budget.
Since that time, officials in the police department, city government, and schools have been indicted, and many, including a former mayor, have been convicted and sent to jail.
Also since that time, the city has begun a slow process of recovery, has had a balanced budget, and has rewritten the city charter.
Last week, Weld signed in, to law the city's new charter, which had been approved by the residents and changes the old nine-member alderman/mayor system to a city manager/city council system.
The new charter, which removes the mayor and all current aldermen from office, will open the door to a more diverse governing body with representatives from each of the city's eight districts and three at-large members.
"We're all feeling that this financing is a major seal of approval on our work in Chelsea,"said Harry Spence, Chelsea's receiver. "Now we can move to a Nov. 8 primary election, a Dec. 6 general election, and a new governing body in place by January."
After Chelsea residents elect the 11 counsel members, the council in turn will hire the city manager. Spence said that although the legislation for the receiver allows him to remain in office until December 1996, he hopes to be out by next June.
"We wanted to make sure, through the referendum, that this form of government was really what the people wanted," he said. "This charter was approved by 60% of the people, so we feel confident about it."
Under the state's schools act, the bonds will be further secured by an advance payment of $8.4 million made by the state into a trust fund for debt service reserves. The interest earnings from that fund will help offset the city's 5% contribution for debt service.
"This deal was pretty tricky from our end," said James B.G. Hearty, executive vice president at Lehman Brothers, and senior banker for this sale. "This extra protection was necessary to sell bonds for a city whose government officers have not even been elected yet."
The financing was also aided by the fact that Spence was able commit future city funds to debt service, even though his job as receiver will end long before the bonds mature, Hearty said.
"Whoever thought to include that section to the legislation was thinking ahead," he said. "Because of this, the city will not have to pay a penalty in the market for its three years of receivership."
Hearty said he expects there to be fairly wide interest in the bonds from funds, insurance companies, and individual investors.
To prevent any sort of mismanagement of the state's funding for the programs, a trustee has been set up to hold the state's funds. The trustee, BayBank, will then make the payments to both the bondholders and the city.
The state guarantees also kept the deal's insurance costs at levels normal for such an issue, Hearty said.
Proceeds from the bond sale plus another state grant of about $2.5 million will be used to consolidate the city's five existing schools into four new campus-style schools.
The four projects are: a preschool and kindergarten that will get $16 million of bond proceeds; an elementary school that will receive $40.5 million; a middle school, $28 million; and a high school, $29 million.
Spence said it remains a mystery why the city did not take advantage of the state's school building program sooner.
"At some counsel meetings, in the days before receivership, board members would reject any school building because the members felt if the schools were good enough for them, then they would be good enough for the kids today," Spence said.
That attitude was considered one of Chelsea's prevailing problems. Under the old charter, there were only six members of the council. None of them were Hispanics, who in recent years have settled in Chelsea in significant numbers.
Spence said this new form of government is designed to more equitably represent all elements of the population.
"People have stopped saying 'those kids' at our meetings and have started to say 'our kids,'" he said.
Construction on the schools is scheduled to be completed in the summer of 1996, and the schools are scheduled to open that September.
