MHCSD: Debt and Bonds

A discussion on Mountain House Community Services District (MHCSD) debt

An astonishing $309,200,000 in Debt 

Mountain House is $309.2 million dollars in debt as of the 2011 Audit Report.  Our debt increased by $20.4 million in the past year.  That might seem like a lot of money – well because it is a lot of money. Let’s put it in real terms.  Every home in Mountain House is responsible for ~$96,600 in debt (assuming 3200 homes).

How does this mountain of debt affect you as a home owner?

Taxes pay for public debt. MHCSD holds the majority of our debt in bonds.  We will pay more tax if MHCSD spends more. We also pay more tax if MHCSD becomes a higher credit risk and has to pay higher interest rates on the new bond issued.

How much of MH debt + interest do you owe each month?

Let us assume that the $96,600 debt that each homeowner owes is required to be paid off in a 20 years bond.  It’s a lot more complicated than a single debt at a single interest rate.  Nevertheless, this example puts us in the financial ball park:

  • $96,600 bond at 4% interest results in a tax cost of $585 per month
  • 6% interest yields $692 per month
  • 8% interest yields $808 per month

Too much debt or higher interest rates on the debt equals lower home values

Higher taxes will pay for the $233 per month difference between 4% bonds and 8% bonds.  An investor who purchased a rental home in Mountain House vs. a similar home in a comparable community would need to charge $223 more per month to achieve the same cash flow. A young couple pre-approved on a $400,000 loan, assuming a typical per month tax on their good faith estimate, would only be able to get a loan for $350,000 in Mountain House due to the higher tax rate.

What can Mountain House do to control our debt payments?

A community issues bonds that pay off over short or long periods. One, six, ten, twenty-five years are the time span of some Mountain House bonds. Think of a 15 year mortgage vs. a 30 year mortgage. Normally the shorter mortgages have lower interest rates and so it is with bonds. It is possible to lower our debt payments by only taking out short-term bonds. However, short-term bonds increase the financial risk to the community because interest rates may spike higher at anytime – so MHCSD takes out some short, medium, and long-term bonds, which is prudent.

Make sure the MHCSD keeps the best credit rating possible by keeping a good financial reserve. Our financial reserve has dropped over the past few years due. The reserve drop is because of sharp increases in the compensation to our MHCSD managers and re-approving major contracts with no competitive bidding.

Grow Mountain House as fast as possible. If Mountain House had 6,400 homes with the same amount of debt, then the financial impact per person would be 50% less.

Keep the home values up by having good schools, good landscaping, and family events.

The sale of assets could reduce the $309.2 million dollars of  debt. However, privatization of our infrastructure resulting in lower payments in lower payments is speculation because our dominate costs are principal and interest payments. If the cost was primarily maintenance then privatization might make financial sense. It is doubtful that MHCSD got a good deal on our infrastructure. It is doubtful our asset value on paper equals the price a private party is willing to purchase the asset for. If these infrastructural deals are anything like the other deals we have investigated, then Mountain House taxpayers got a raw deal. Therefore, a sale of assets could not be on the actual worth of the assets, but on the assets and promises to make guaranteed payments to the private buyer/operator.

Mountain House has many bonds with different interest rates and maturities at various debt levels. Here are two examples.

  • 5.75% Bond maturing in 2035 issued in 2011
  • 4.00% Bond maturing in 2019 issued in 2011

Should we worry or not worry about the mountain of debt in Mountain House?

How do we tell what the situation with Mountain House debt is?  There are two ways I evaluate community debt; bond ratings my a bond rating service and eh bond market prices and yields of the existing Mountain House debt.

In 2007 our bond rating was A- which means Mountain House has a “STRONG capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.”

The rate of default for A- rated entities is less than 1%. Of course, that 2007 rating was at the height of the housing boom.  What about post housing bubble collapse?

In 2011 S&P re-issued the A- bond rating and commented that:

“The outlook is stable. In our opinion, specific credit strengths include the following factors: A growing customer base; MHCSD’s location in San Joaquin County, with access to the diverse Bay Area economy; and A primarily residential base, with no significant customer concentration.”

This statement means that our bond holders should not worry about default for the following reasons: the post-housing bubble Mountain House residents earn a living from the healthier Bay Area economy than the sickly Stockton economy; Mountain House continues to add homes that may lower the debt per home; and Mountain House residents work for many employers spreading the risk. We should interpret this statement as generally good news because an A- credit rating helps with the re-financing of our maturing debt as it matures with lower interest rates and therefore less cost.

S&P also wrote: “The district’s relatively high rates (meaning tax rates), which escalate annually (and) an increase in debt service requirements” negatively influence our credit rating.

This means our tax rates are high even by California standard. S&P is concerned that Mountain House families might not have the household finances to support still higher taxes if MHCSD suddenly needs cash for an infrastructure problem or other emergency. S&P  furthers points out that even in the face of high taxes the MHCSD board continues to raise tax rates each year and despite the increasing tax rates, the amount of debt in Mountain House continues to rise.

The MHCSD board discusses the bond rating on occasion.  However, the sloppiness and attitude of the budget manager does not give me comfort. There was a discussion of a drop or potential drop in our credit rating – but who knows, I cannot find the documentation to support the comments at the board meeting. Therefore, for the purpose of this article I will stick with the public statement from S&P.

Bottom Line: Mountain House debt is stable, but we will be paying high taxes for a long time to come.

Nevertheless, does the Bond Market agree with S&P comment?

I reviewed many of the Mountain House bonds. The current bond prices and yields indicate that as of July 2012, Mountain House debt is stable and the bonds are trading at normal prices. However, the debt environment is very unstable as illustrated by evaluating one particular bond issued in 2007, bond 624121AM1. I picked this particular bond because it has a long maturity, was traded frequently, and went through the bond market ups and down of the housing bubble implosion.

In 2010, a $100 5% bond 624121AM1 was yielding between 5.1 and 5.5%  with a price around $90.  $10 off the face value of a bond in a normal market means that the bond market considered Mountain House to be a little risky, but not extremely so.  A $90 priced bond at maturity will pay $100.  Thus, if you buy the 5% bond at $90 the additional $10 adds to the overall profit of owning the bond on top of the regular interest when it matures.

The price of a bond drops because bond investors found better investments with higher rates of return for the same or lower risk. The price of a bond increases because investors believe the bond is offering a better rate of return for the same or lower risk.

In 2011, the same bond was yielding 6.77% with a price of only $73.79!  The bond in 2011 was almost as cheap as some of the bond trades in 2009 around the housing crash where the bond price dropped to $70 with a yield of 7.13%!!

Now in 2012, the same bond yields 4.8% with a price of $103.50 indicating Mountain House bonds are lower risk.

Bottom Line: today the market agrees with S&P’s statement. However, the market has been volatile and it would be foolhardy to extrapolate much.  Even a broken clock is right twice per day.

So why were Mountain House bonds in 2009 high risk, 2010 normal, 2011 high risk, and in 2012 normal ?

The reason is Federal Reserve Policy — yes, the Federal Reserve’s actions affect you directly.

Unfortunately for a capitalist like me, the stock and bond markets are moving largely based on government and Federal Reserve stimulus policy and not on fundamentals.  QE1, QE2, and Operation Twist were programs designed by the Federal Reserve to knock bond interest rates and they did just that. By evaluating the bond interest rates during the periods of less government interference vs. periods of time when stimulus policy was in full effect, we can take an educated guess as to what the unaltered Mountain House bond interest rate would be.  I predict the Mountain House long-term bonds will settle in around 6.5 to 7% if or when the Federal Reserve stops their various economic stimulus programs (even with an A- rating).

So the real bottom line: Overtime the Federal Reserve stimulus programs will stop and will eventually be unwound — according to the Federal Reserve they have mentioned holding down rates until 2014.  The market has said that our long-term and probably short-term debt will go up about 2%, which is equal to about $110 per month in additional cost per home.  The jump would not happen quickly but occur in small steps as each bond matures and is re-priced AFTER the Federal Reserve stops their pumping which might not happen until 2014.

What to you should really worry about — Financial forces

All of the above assumes: the State of California and San Joaquin County manage to contain their unfolding financial disasters.  State and county governments employ a lot of people in and around Mountain House, pay pensions, and support welfare programs.  San Joaquin County government cut aggressively with more cuts coming. In contrast, the State of California continues to delay the major cutting required to get our budgets in balance. Left unchecked, many more communities in our state will continue to go bankrupt and eventually Mountain House and much of California could be red lined by bond investors driving up the cost of debt in to unsustainable levels as we currently witness in Greece, Spain, and Italy.

Financial forces outside of Mountain House can dramatically influence what our interest rate on our big fat $309.2M debt is going to be.

What to  worry about? Mediocre Politicians

Even worse, in the face of massive debt and plunging tax receipts, Governor Brown and the free-spending liberals in the State Assembly and Senate have decided to spend billions more on a medium speed train down the Central Valley. One of the biggest advocates for this boondoggle is Cathleen Galgiani. She is running to become our next state senator representing Mountain House. The $100+ billion North-South route Ms. Galgiani advocates for does  nothing to help Mountain House and will take decades to complete. Instead of building a $100B+ train to nowhere, I would recommend considering a fast Bay Area to Central Valley route. The idea is similar to the excellent ACE Train on steroids:  faster and with a station near Mountain House. A route like this would add $2 to $3 billion in residential home values in South San Joaquin County. Even better, reduce regulation in San Joaquin County, provide fast permitting, make the necessary budget cuts, and bring technology companies to the local area.

The debt bomb that investors and business people are watching in the national, state, county, and local level alters the amount of risk we are willing to take in creating new companies. Fewer new companies equals fewer jobs. California now ranks dead last 50 out of 50 in business creation.

John McDonald

11 Responses to MHCSD: Debt and Bonds

  1. MH4Life on August 17, 2012 at 4:19 am

    Great Post… Seems that Mr. McDonald is a very experienced person and knows what he is talking about.

    (snip~ unsubstantiated claim)

  2. Dave on August 18, 2012 at 3:56 am

    MH is going to be like city of Bell in the near future. Starting from the most scandalous manager, president, to the board of directors need to be investigated for the amount of money they collect. How can you justify when a vice president and members of the board sit at home and amass over 350,000 in salary and benefits. The taxpayer is going to pay for their salary. Once this corruption and scandal is exposed to the public, everyone will be held accountable. I refuse to pay higher taxes while these scumbags steal money from the residents of the greater MH.

  3. Dave on August 18, 2012 at 6:08 am

    All board members are up to no good.

  4. […] Debt and Bonds […]

  5. admin on August 18, 2012 at 2:24 pm

    Editor >> I’ve never seen any evidence that suggest that MHCSD board members are collecting income above and beyond the paltry amount they get for attending board meetings. There are plenty of things that make one really wonder what is up with MHCSD, for example $1.8M in debt that suddenly appears, no bid contracts, the difficulty in getting clean detailed financial documents, the number of independent contractors hired at excessive rates, board members pushing for certain contractors to be used, odd conversations between the former GM and board members, and even the excessive anger from board members and MH suppliers when residents have legitimate questions. MH Reporter calls for a detailed State Audit of MHCSD. We know that MHCSD is audited every year, but that is not the same type of audit we are calling for. One only has to watch the Lammersville Unified School Board to see what a well run community board should look like.

  6. John McDonald on August 18, 2012 at 3:23 pm

    Hi Dave, I’ve never seen any evidence that would suggest that Jim Lamb (VP of MHCSD Board) is getting money above and beyond the paltry amount (<$6000/yr. budget) the board members are paid. It is not fair to Jim to make such a charge without hard evidence. Jim and Heather Lamb are honorable people to the best of my knowledge and I've referred business to them. My disagreements with Jim are strictly issue based. His family members and a few of his supporters have exhibited really poor behavior in the political process and life has dealt with them far harsher than I could, but Jim has been careful to separate himself from their behavior.

  7. Dave on August 19, 2012 at 8:49 pm

    Board members aren’t always in the office. Isn’t it true? I am eager to know if their job is per diem? Can they release their tax return to prove that he/they would earn meager. I would believe you if I see what they earn (including housing, transportation, medical, pension etc)

  8. ForrestG on August 20, 2012 at 3:11 pm

    you got your information totally wrong Dave. Board of directors are not MHCSD employees. They are just residents like you and me. All they get paid is $100 per each MHCSD Board meeting they attend. If you think that is a well paid job… you should apply.

  9. Dave on September 13, 2012 at 4:45 pm

    There is serious mismanagement practice by the management office. It isn’t going to do any good if you try to convince me if BOD are just residents. The real issue here is waste, abuse and possible misappropriation of public funds. I bet if mountain house financial transactions for fiscal years 2006-2011 is reviewed by the state controller, the public would know more about this abuse. Just wait and see.

  10. professional95391 on October 28, 2012 at 10:29 pm

    MH Residents, wake up. This is your time.

    Every single resident should read the Financial Statements for 2010 and 2011. They should also read about the Budget outlook for 2013. These two documents are the eye-opener for residents who leave homes early in morning, commute everyday and spent precious time of their life in traffic… just to make both ends meet for their family. Let me give residents only two facts on Mountain House financials 1) Reserves will deplete to ZERO in 3-4 years depending on the yearly deficit. 2) Proposed Tax in 2013 is 9.6% (Breaking ALL Previous records). Proposed increase in personnel expenses (including Salaries) is 4% in 2013.

    Residents ! Please Wake up. This is TIME for you to make a Change in your lives, VOTE for CHANGE in Election. Incumbents should Go. (Those who disagree, please post me comments and I quote you page numbers from the MH Financial Statements)

    Hope MOUNTAIN HOUSE wins this Elections.

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