Borrowers Skirting Voters Face Bond-Sale CrackdownDavid Mildenberg
Fort Worth, Texas, avoided voters when it sold $86 million of bonds last year to finance a police and fire facility. An El Paso hospital system plans new clinics using $162 million of debt taxpayers won’t have a say on.
Cities, counties and hospital districts in the second most-populous state raised $1.3 billion last year, 10 percent of their issuance, using securities called certificates of obligation. These bonds, which are financed through appropriations, don’t need to go before voters, unlike general-obligation debt backed by a municipality’s full faith and credit. The issuance faces tighter restrictions under bills in Texas, North Carolina and New York that would make it tougher to borrow without taxpayer approval.
Securities such as these make up more than 60 percent of the $3.7 trillion municipal market, according to the Securities Industry and Financial Markets Association. Limiting them might shrink the supply of bonds and boost prices, said Matt Fabian at research firm Municipal Market Advisors. Curbs could also delay investment in infrastructure such as roads and bridges.
“Too often governments are using these to make an end-run around taxpayers,” Texas Comptroller Susan Combs, a Republican, said at a Feb. 7 press conference, referring to certificates.
After the recession that ended in 2009, a move toward fiscal austerity has contributed to a decline in new financings, according to Citigroup Inc. Fresh issuance, as opposed to debt for refunding, was below $150 billion the past two years, the lowest in at least a decade, Citigroup data show. Potential rejections by voters would slow sales further, said George Friedlander, Citigroup’s managing director of muni research.
“You have a lot of states whose voters are moving fairly hard to the right fiscally,” he said. “This is a direct conflict with the need to deal with long-term issues like infrastructure, maintenance, repair and rebuilding.”
Restrictions on issuance may “worsen the current imbalance of supply and demand,” said Fabian, managing director at Concord, Massachusetts-based Municipal Market Advisors. “To the extent this further reduces debt, it would be bullish” for munis, he said.
Supporters of clamping down on issuance that doesn’t go before voters range from New York Comptroller Thomas DiNapoli, a Democrat, to a Texas Tea Party group that pressed a state committee chairman to give voters more say.
Debt issued without elections accounts for 95 percent of New York’s state-funded obligations, DiNapoli said in a memo this month supporting a bill that would restrict such borrowing.
The state won’t change its practices, Robert Megna, budget director for New York Governor Andrew Cuomo, said on a Feb. 13 conference call with reporters. Borrowing through authorities is the way New York has issued debt the past 30 years, Megna said.
“A lot of people feel there isn’t enough oversight,” said John Hallacy, head of muni research at Bank of America Merrill Lynch in New York. “But I don’t think officials are being irresponsible and just issuing debt for the sake of issuing debt.”
In Texas, Comptroller Combs favors a bill to prohibit using certificates of obligation for projects that voters have rejected, while requiring bond election ballots to include specifics about use of proceeds and any tax impact.
More than 600 Texas cities, counties and hospital districts issued $14 billion of certificates since 2005, or 16 percent of their total debt, according to the Texas Bond Review Board.
Fort Worth, a city of 760,000 about 35 miles (56 kilometers) west of Dallas sold tax-exempt certificates of obligation in August for its public-safety headquarters to lock in low interest rates, rather than wait for a planned bond vote in 2014, said Mark Rauscher, a city program manager. Municipal yields fell to the lowest in a generation last year.
The city had $202.9 million in certificates along with $371.8 million in general obligations as of Sept. 30, 2011, financial reports show.
“In many cities a police and fire station would be part of a general-obligation package,” said Sheri Greenberg, director of the Center for Politics and Governance at the University of Texas at Austin. “I wouldn’t say you should never use them, but the question arises when they involve something that would traditionally go before voters.”
Fort Worth citizens deserved a say on the project, which garnered little publicity, said John Tunmire, a real-estate agent running for city council.
“Unless you watch the meeting recordings, it’s really hard for the public to know what’s going on,” he said.
Selling certificates enabled Fort Worth to negotiate the best interest rates, said city Councilman Jungus Jordan, who is president-elect of the Texas Municipal League, an Austin trade association representing cities.
“We only use certificates of obligation for the best projects that are high priority,” he said.
The city’s $86 million August sale included a 10-year portion priced to yield about 2 percent. That was about 0.3 percentage point higher than benchmark munis, data compiled by Bloomberg show. The bonds have an Aa1 rating from Moody’s Investors Service, second highest.
North Carolina State Treasurer Janet Cowell, a Democrat, has recommended using voter-approved debt as the state’s “preferred” funding source, partly in the interest of transparency, though there hasn’t been a statewide bond election since 2000.
Two Republican representatives in North Carolina with Tea Party backing filed a bill in January to repeal the state’s ability to issue certificates of participation, except in emergencies. These securities, which are subject to annual appropriation, don’t require voter approval.
Since voters approved a $3 billion plan in 2000, the state has spent an additional $3 billion on university buildings and other projects through so-called special-indebtedness bonds, which don’t require voter approval.
The El Paso County Hospital District in Texas plans to issue $162 million of certificates of obligation to finance three clinics, said Michael Nunez, chief financial officer. The expansion will cost the owner of a $100,000 home in the district about $20 per year, he said.
“I can see why there is some potential criticism,” Nunez said. “But we want to plan these clinics in 2013, build them in 2014 and have them going by 2015.”
Tea Party members complained to Texas state Senator Tommy Williams, Republican chairman of the Senate Finance Committee, about the sale last year of about $30 million in certificates of obligation by Montgomery County outside Houston. The offers came less than a year after voters represented by Williams rejected a $200 million bond for roads.
“When you see a political body abusing the situation, which we thought Montgomery County was doing, we got a little excited,” said Jon Bauman, vice president of Texas Patriots PAC, a local Tea Party political action committee.
Williams last month sponsored the Texas bill targeting certificates. Combs supports the measure. Both chambers of state the legislature and all statewide offices are controlled by Republicans.
“There’s no doubt requiring more elections could block some projects,” said Alan Sadler, administrator of Montgomery County. “But we don’t plan on doing any more road projects without voter approval.
“Voters should be given an option on large, optional projects,” he said. “And more than $10 million is extremely large.”
In trading yesterday, tax-exempt benchmarks due in 10 years yielded about 1.84 percent, close to the highest since August, Bloomberg Valuation data show.