In affecting bond market, fallout from Colorado battle could spread far and wide

Kelly Sloan
Kelly Sloan

A little-known legal and political battle in Southeast Colorado has the potential to cause irreparable damage to the municipal bond market. Naturally, a radical environmentalist group has its lawsuit-green fingerprints all over it.

In 2004, the Arkansas River Power Authority (ARPA) decided to convert an aging gas-fired power plant in Lamar to coal. Coal, you’ll remember, was considerably less expensive than natural gas before the mid 2000’s fracking boom changed the equation. Lamar and the other six ARPA members took on bond debt to the tune of $146 million to fund the project. The effort became the civil engineering equivalent of Napoleon’s Waterloo offensive, suffering from bad luck, cost overruns and design problems. These were worked through until a manufacturer delivered a defective boiler that failed emissions standards.

The lawsuit-generating WildEarth Guardians‚ well known in Western Colorado for its serial environmental litigation aimed at overturning the industrial revolution in appeals court, didn’t miss a beat and promptly sued. The resulting settlement shuttered the project.

The settlement didn’t, however, eliminate the debt held by ARPA members that now owed their respective shares of the $146 million (plus interest), without a power plant in Lamar to show for it. Thinking this terribly unfair, the City of Lamar filed a lawsuit to absolve itself of the debt.

Here’s where the troubles begin for the municipal bond market. Were Lamar to prevail in its legal effort, a precedent would be set in which other municipalities — or states for that matter — that find themselves with infrastructure bond debt issues could look at what Lamar did and choose to simply sue their way clear. The effects on the traditionally safe municipal bond market are obvious and sobering. Perceiving the heightened risk of municipalities legally walking away from their debt obligations, bond insurers will increase the normally below-prime interest rates substantially to cover this new risk. This will make financing for local projects more difficult and expensive, and local ratepayers will be forking over considerably more money for those projects that do receive funding. Millions of Americans’ retirements could be at risk as well since many retirement plans are funded by municipal bonds and therefore susceptible to the mass sell-off in the $4 trillion mini bond market that would likely result. 

Fortunately, wiser heads prevailed in Lamar and a settlement was reached in which Lamar receives about $11.4 million in compensation from ARPA over 26 years. Lamar is, after all, the entity that has been most hurt in all this and the only ARPA member community now without a power plant. As a key component of the deal, the debt is being refinanced with the interest being cut roughly in half.

The settlement takes advantage of still-rock-bottom interest rates and allows everyone to pay a great deal less in debt service while avoiding costly litigation and the risk to the municipal bond market.

Alas, there’s a new twist. The City of La Junta, Lamar’s neighbor and fellow ARPA member, is holding out on accepting the deal. La Junta has taken a remarkably myopic stance in objecting to the settlement. At issue are the payments to Lamar, included to compensate for the loss of the plant, its share of which La Junta is apparently seeking to reduce. Yet, by its own admission, those payments to Lamar will be more than offset by the savings achieved in the refinancing. But of course, if La Junta kiboshes the settlement, there will be no refinancing. The suit will go to court and either A) Lamar loses and everyone pays at a higher, un-refinanced rate, or B) Lamar wins, meaning La Junta and the other ARPA members now pay Lamar’s share of the debt at the original, un-refinanced rate. Oh, and the precedent is set that could trigger a massive sell-off in the muni bond market, making any future bond-financed project much more expensive.

While this legal whirlwind spins in Southeast Colorado, lawsuit hunters with WildEarth Guardians have retreated to their office — which one must presume is hot, dark and equipped only with recycled pencils and bark tablets, as use of electricity is clearly offensive to the environment — unscathed by any of the fallout they helped to create.

Hopefully, common sense and foresight will win out in this drama and the settlement will be accepted. But the episode serves as a warning of sorts. 
The hyper-litigiousness of the left — not only environmentalists, but also big labor, the ACLU, etc. –— remains ascendant, and threatens development projects of all kinds with increasing frequency, making situations like that in Lamar more commonplace. If a settlement is not achieved and Lamar sets a precedent, then the WildEarth Guardians path of destruction will have extended beyond western energy projects and mining towns to affect, well, pretty much everyone.