Archive for February 15th, 2009

Taxpayers lost big on Rio Nuevo bond sale

By not delaying it, as other US areas did, city may have to pay extra $10M or more

By Rob O’Dell

Arizona Daily Star

Tucson, Arizona | Published: 02.15.2009

When other communities across the country were pulling out of the bond market in December as the failing economy pushed interest rates higher, Tucson forged ahead with a Rio Nuevo bond issue.

The move potentially cost taxpayers more than $10 million in extra interest — money that could have gone into projects instead — because the municipal bond market recovered in January and February, experts interviewed by the Arizona Daily Star said.

One municipal bond expert put the potential loss at as much as $18 million.

The city’s bond adviser, Shawn Dralle of RBC Capital Markets, estimated the savings from delaying the bond sale would have been a much smaller $5.4 million over the life of the bonds, from 2011 to 2025.

Tucson issued $78 million in bonds for its Downtown redevelopment district Dec. 15-17, as state lawmakers were openly threatening to take back the state sales taxes that go to Rio Nuevo because of the project’s perceived lack of progress.

Several experts said interest rates now would be about 1.2 percentage points lower than the nearly 6.5 percent the city sold its bonds at in December. Dralle estimates the rate difference would be only 0.25 percent to 0.5 percentage points lower.

Several Tucson officials said no one could predict future interest rates, and added that the city sold the bonds to get Rio Nuevo projects moving. The legislative threats weren’t a factor, they said.

But numerous communities across the country delayed their bond sales in December. A January report from JP Morgan Asset Management said many issuers were postponing year-end bond sales because they were unwilling to pay the high yields required to attract buyers.

Just three days before Tucson’s sale, New-York based municipal bond adviser Freda Johnson told Bloomberg News it was recommending “borrowers delay their sales if at all possible” because of high yields and weak demands.

Mayor Bob Walkup said the bonds were sold to get Rio Nuevo moving in response to criticism from the public and the media about a lack of progress. He said the legislative threat to take the money back “wasn’t even a discussion.”

“I think we still did the right thing at that moment,” Walkup said, adding the city can’t predict interest rates. “If you find the guy with that crystal ball, let me know because we can make a lot of money.” Action delayed elsewhere

Deven Mitchell, executive director of the Alaska Municipal Bond Bank Authority, said the bank pulled back two bond issues in early to mid-December, one for a prison and the other for money that would be loaned to municipalities. The Alaskan bonds had similar ratings to Rio Nuevo’s, although Tucson spent $750,000 on bond insurance to boost its rating several levels.

The bond bank waited for the markets to calm down and then sold its bonds “as soon as possible” at rates under 6 percent just before Christmas and again in January.

It’s a difficult decision, Mitchell said, because if you need the money to start construction, it can be better to issue the bonds than wait.

But the amount of construction to be done with the $78 million in Rio Nuevo bonds is limited, with $58 million split between design and construction for 13 projects Downtown and on the West Side. One expert questioned the amount of “soft costs” for design in the bonds.

A total of $20 million went to pay back a loan to the city, into a reserve fund or for bond insurance.

Issuers as disparate as the state of Minnesota, the District of Columbia and Oklahoma City delayed bond sales at the end of 2008 because of market conditions.

In Florida, top state officials questioned the state bond director in January over a bond sale for universities on Dec. 14 with an interest rate of 6.16 percent, pointing out that another Florida issue a month later fetched a rate of 4.7 percent. The director blamed volatile credit markets. Higher interest costs

Michael Stanton, publisher of the Bond Buyer newspaper, looked at the difference in market rates — calculated from municipal market data or MMD — between December and the second week in February.

He said the average rates today are about 1.2 percentage points lower than rates were in December, resulting in roughly $10 million more in interest costs for the December bonds.

Stanton made a second calculation of only $4.3 million in savings using an index of revenue bonds — which are paid off with revenuelike sales taxes. But the Rio Nuevo bonds are backed not just by sales taxes, but by the city’s general fund as well.

Alvin Boutte Jr., managing director and head of the Midwest region for Chicago-based investment banking firm Grigsby & Associates Inc., estimated the difference in interest rates cost the city $18 million in interest over the life of the bonds. He estimated the city would pay 5.2 percent on the bond issue today.

In a larger issue by the city of Chicago on Jan. 20, Boutte said, the interest rate for 15-year bonds was 4.81 percent. By contrast, the yield for Tucson’s 15-year bonds is 6.79 percent.

The companies that underwrote Tucson’s bonds declined to estimate what the difference in interest rates cost Tucson. Stone & Youngberg said there were too many variables to calculate. Piper Jaffray referred calls to the city’s bond adviser, Dralle at RBC Capital Markets.

In a statement, Dralle said the rates did drop in January but that much of the drop was “on paper” because there were few sales, and many issuers had higher credit ratings — although the city paid $750,000 for bond insurance to boost its credit rating equivalent to AAA.

Dralle said the bonds got the best rates they could at the time they were sold, and estimated that Rio Nuevo bonds today would sell with interest rates between 6 percent and 6.25 percent because of “a worsening economy and with Legislative threats to the revenue.”

Jaret Barr, assistant to City Manager Mike Hein, said interest rates have dropped, but estimated the impact was more like $5 million.

He added the city talked about waiting but decided to move forward to keep projects going. He challenged those who criticize the city’s decision to tell him what the interest rates will be in March, since they think the city should have been able to see the future. Deliberately hurried

State Rep. Frank Antenori, R-Tucson, has railed against the city bond sale for months, contending the city knew it was getting a bad deal but went out to market anyway to commit the money so the Legislature wouldn’t be able to take it away.

“It was deliberately done in a hurry to use it as a bargaining chip,” Antenori said. “Because it was somebody else’s money, they just did it.”

Councilwoman Nina Trasoff countered that Tucson proceeded in order to jump-start important projects, acting on the advice of its bond attorney.

“You can always second-guess these things,” Trasoff said. “It’s always easy in 20/20 hindsight to say, ‘gee, if.’ ”

Contact reporter Rob O’Dell at 573-4346 or rodell@azstarnet.com.

161 Comments on this story

Education is a hot potato right now in AZ. This press release came our way from the legislative leadership.  

A prior post regarding Antenori’s Op-Ed denial by the Az Star pointed out that;

Raise taxes you say and and cut less? Here’s an interesting fact I heard from another State legislator; it took Arizona 100 years to grow it’s budget to $6 billion. It took Napolitano only 4 years to grow it to $10.3 billion. Do you think we over spent a bit? 

 Google, Education Spending Arizona, and you’ll find a bunch of sources for yourself. Look at the issue and do some homework, then make up your own mind.

Why it is INACCURATE to say Arizona ranks 49^th in Education:

§         This is just ONE statistic, based solely on a “per pupil” spending calculation

§         The “per pupil” spending calculation does not take into account the following:

                     i.      uniformity as to what funding categories go into the calculation from state-to-state (for example, Arizona has consistently ranked at the top for capital expenditures per pupil, but none of those dollars are factored into Arizona’s per pupil calculations)

                   ii.      actual dollars spent in the classroom from district-to-district or state-to-state

                  iii.      cost of living adjustments

                 iv.      voter-established constitutional requirements/limitations for education funding

                   v.      estimates and redundancies in student counts

                 vi.      calculation variances that occur because of rapid growth issues faced by states like Arizona, versus states experiencing little, no or negative growth

§         It makes absolutely no sense for public policy to be driven by one isolated apples-to-oranges statistic, which looks at education spending in a vacuum

§         There are better gauges to education ranking that are outcome-based indicators, such as student achievement, test scores, etc.

§         The per-pupil expenditure is really a reflection of class size, excluding the idea of efficiency

§         A general state analysis by ALEC, as well as one by the RAND Corporation of California’s massive (and expensive) effort to reduce class sizes, has found no correlation between class sizes and test scores.

¹ JLBC: Arizona Joint Legislative Budget Committee; ALEC: American Legislative Exchange Council; NEA: National Education Association; BEA: Bureau of Economic Analysis; NSF: National Science Foundation; ATRA: Arizona Tax Research Association.

² “Instructional staff” includes teachers, as well as principals, supervisors of instruction, guidance personnel, etc.  It does NOT include administrative staff.