Go to BeeHiveSites.com to learn more!
Creative Financing In Manassas Park
By Greg L | 7 May 2007 | Manassas Park | 2 Comments
If you really want to lull an electorate to sleep, start talking about complex financing arrangements for capital improvement projects involving municipal bond issues and refinancings. Talk about raising taxes, and voters tend to come out of the woodwork, but given that few understand how municipal bonds work, and even fewer care, it would seem that just about anything can be rammed through as part of a bond package. Manassas Park provides a wonderful opportunity to test this concept.
Last month the Manassas City Council approved a financing plan for the $33 million Cougar Elementary School expansion after being given a twelve page briefing booklet and a presentation by Davenport & Company, who will be the underwriter for the bond issue and stands to earn about half a million dollars if this package is approved by the voters. The financing plan involves using $7.5 million in “Literary Fund Loan” borrowings, refinancing a 1999 bond issue, about $25.5 million in proceeds from a new bond issue, and also arbitrage proceeds. Manassas Park has a less favorable “bond rating” that the surrounding jurisdictions of Manassas City and Prince William County due to a relatively higher debt load than these jurisdictions, and thus will pay a higher interest rate because of the increased relative risk of default.
The arbitrage component of this package is what raised my eyebrows the most. The idea here is that the city borrows all of the money it will need for the entire project upfront, and then invests those proceeds in “taxable short-term investments”, which would pay a greater rate of return than the interest rate the city would pay to borrow the money. As long as everything goes according to plan, you make some profit. If it doesn’t, well, you take a loss. That loss could amount to the entire balance of the proceeds of the bond issue.
If this was such a great idea, we probably would have seen an arbitrage component to the $300 million transportation bond issue in Prince William County that voters approved last November. The county can borrow money more cheaply than Manassas Park is able to, and would make an even greater rate of return than the park. They didn’t. The county, which is in much better financial shape than the park, decided not to in order to ensure that the debt load at any one time was below that required in order to retain an AAA rating, and because the market risk of trying to do arbitrage with proceeds from municipal bonds would be unacceptable to county taxpayers. Yes, the county could have saved some money by doing the debt issue all at once, but this fiscally responsible jurisdiction believed the responsible thing to do is borrow money only when you need it, and not try to play the markets. The result of this fiscal sanity is that the county is in pretty good financial shape, even during a downturn in the residential real estate market.
Another eye-opener in this financing plan is that it will “back load” a substantial portion of the debt service. This is sort of like taking out a mortgage with an initial rate that holds for a few years, which then coverts to an ARM. Homeowners can responsibly do this when they know they’ll be able to refinance in a few years at a more favorable rate, or have some concrete reason to believe that their future cash flows will be higher than their current cash flows. It’s also somewhat similar to dramatically cutting the public works budget in order to offset new spending, and counting on angry citizens to show up demanding a tax hike later on because the roads are full of potholes. Yes, the city is doing that as well, but that’s another story. At any rate, this is very risky, because there’s no guarantee that the additional funds needed for debt service are going to show up in the out years, especially when it’s clear that the city could not absorb those costs now. Right now total debt service for the schools is at about $3.8 million a year. Under the new plan, that figure is projected to rise to almost $6 million between 2012 through 2020.
From where will the revenue come from to pay for this additional $3 million in debt service obligations? Tax revenues from tenants of Park Center, which is currently under construction? With the current glut of new commercial space available on the market, and no interest by prospective tenants in the project, it hardly looks like that project can be counted on to close a $3 million spending gap. Will residential taxes then end up paying for this? Since about 90% of the current tax base in Manassas Park is residential, that’s a pretty safe bet. Throw in arbitrage risks, and this may well become more than a 10% increase in the annual school budget.
Manassas Park residents are already taxed at a rate 20% higher than Manassas City and Prince William County. Will they tolerate being obligated to pay even higher taxes in the future because of this bond issue? Or since this is all buried within the minutiae of a bond financing and restructuring package will Manassas Park residents slumber on while the city spends itself into fiscal insolvency? The government you get is the one you prove you deserve, and it’s up to the residents at this point to show they deserve better than this.
Otherwise the next question will be when can Colonial Downs get another shot at a referendum to start off-track betting in Manassas Park so they can generate the tax revenues needed in order to pay for the obligations the city has incurred.
The opinions expressed here are solely the views of the author, and not representative of the position of any organization, political party, doughnut shop, knitting guild, or waste recycling facility, but may be correctly attributed to the Vast Right-Wing Conspiracy. If anything in the above article has offended you, please click here to receive an immediate apology.
You can follow the discussion through the Comments feed.
2 Comments
Views: 668
Loading ...
One needs only to look at Orange County, CA, circa 1994 to see just where some of this “creative financing” can get you. Chapter 9 bankruptcy anyone?
There’s the MASSIVE pothole that was in the right northbound lane of 28 just north of Manassas Drive. I remember it well, because I honestly wondered how it could’ve gotten that bad. It was at least a foot deep.
Oh, this was sometime in 1996, wasn’t there a referendum for OTB in November of that year?
I know the saying is, “Never attribute to malice that which can adequately be explained by incompetence”, but with this city, it could be either one.