The Insurance Charade

Sold Bonds 16 Times

The Las Colinas taxing district has sold bonds 16 times to cover expenses and pay bondholders for previous debt, public records show. Most of the bonds were insured by MBIA or Ambac. The district could have called on the insurers to pay out at any time by defaulting. It never did and refinanced instead, tapping into taxpayer money. The debt today is still about $311 million.

By the late 1990s, the tax rate the district charged property owners was so high it threatened to cause a collapse in property values, the district says. In 1998, the tax rate was $1.59 per $100 of valuation, up from $1.14 in 1994. That's when the district conceived a plan to create a special tax zone that would capture city and school taxes.

More than 200 residents of Irving, Texas, signed a petition opposing the idea and attended an Aug. 5, 1999, city council meeting to object.

``Let the people take some bankruptcy licks,'' said Jerald Cannon, an Irving resident, according to a transcript of the meeting. ``What those people did is not our responsibility.''

Robbing From Education

Manuel Benevides, another resident, said, ``You are robbing money from education, from the education of these young people who deserve the best education they can get.''

Kenneth Heffley, chief financial officer and tax collector for the district, says the special tax zone served the public interest. ``It sped up the funding of the infrastructure, which was necessary for further development,'' he says. ``Participants agreed it was necessary to get a jump-start.''

When equipment supply company owner Morris turned up at his office on May 14, 1999, to find that a bulldozer had knocked a hole through the wall, he suspected it was a response to his spearheading a campaign against the tax plan.

``I wish they had taken bankruptcy and let the insurer pay the debt,'' Morris says.

Despite the protests, the district created the tax zone.

Tax Zone

Since 1999, the city of Irving, the Irving Independent School District, the Carrollton-Farmers Branch Independent School District and the Dallas County Community College District have contributed more than $6.7 million in taxes for Las Colinas, according to a district report.

The schools' portion would have otherwise been sent to some of the poorer schools in Texas under a state-mandated system called Robin Hood funding, in which wealthy districts share money with lower-funded schools.

In Grady County, Oklahoma, another insured municipal bond turned out to carry far more risk than a typical triple-A-rated debt issue.

This one, too, was bailed out by taxpayers.

In 1998, architect Lawrence Goldberg of St. Joseph, Missouri, pitched building a jail as a way for Chickasha, Oklahoma, to create jobs as local manufacturing declined. Taxpayers in the central Oklahoma town voted down a local sales tax to fund the jail. Instead, the Grady County Industrial Authority sold $12.6 million of bonds, insured by MBIA.

The bonds were supposed to be paid off by revenue the prison collected from local, state and federal agencies that pay to have people incarcerated. By 2003, the prison wasn't taking in prisoners at a high-enough rate to make the required payments to bondholders. In July 2003, taxpayers rejected another referendum, one that would have covered the jail debt by using tax money to pay bondholders.

Get Jail Debt Paid

By mid-2004, MBIA had stopped insuring bonds in the state. MBIA never announced a moratorium on insuring bonds in Oklahoma; it just stopped sending bids to provide bond insurance, says James Joseph, Oklahoma's state bond adviser in Oklahoma City.

The company met with Joseph and other state officials to try to find a way to get the Grady County jail debt paid, says Joseph, who says he told MBIA there was no government guarantee on the bonds.

``MBIA was trying to pressure the state to do more, but there wasn't much more we could do,'' Joseph says.

The moratorium was inappropriate, says Cal Hobson, a Democratic state senator.

``The bottom line is the citizens of Grady County never approved any funding source to underwrite the bonds,'' Hobson says.

Mitchell Sonkin, head of insured portfolio management at MBIA, says, ``During a short period of time, MBIA did not consider insuring credits in Oklahoma while we had the opportunity to assess the Grady County situation.''

The state came to the rescue, for bondholders and MBIA.

Legislative Involvement

On Oct. 27, 2004, the Oklahoma Department of Corrections cut a check to the Grady County Criminal Justice Authority for $645,183 to help meet a bond payment, Corrections Department spokesman Jerry Massie says.

``There was legislative involvement to protect the state's credit rating,'' he says, adding the state feared the possible consequences of taking money from a bond insurer.

The Department of Corrections wasn't the only public source of funds to cover the jail bond. Other payments to bondholders have come from the county, which paid about $1 million, and from the general fund, the housing authority and a trust fund, says John Mosley, chairman of the Grady County Industrial Authority.

The Department of Corrections money came from its so- called canteen fund, which is intended to provide inmate and guard recreation and is funded from proceeds of goods and services paid for mainly by prisoners' families.

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