Taxpayers in Stanton, a quiet suburb of Orange County with only 38,000 residents, will pay millions for a pricey bond deal approved in an obscure vote of a little-known city agency five years ago.
Rather than risk voter rejection over the deal, Stanton city council members David Shawver, Alexander Ethans and Brian Donohue – acting in their capacity as board members of the city’s redevelopment authority – voted in favor of the 2011 bond issue.
The decision to borrow at high rates – some exceeding 9 percent – was likely driven by activity in Sacramento. In the state capitol, the Brown Administration had proposed to shut down local redevelopment agencies across the state. The end of redevelopment would ultimately kill the Stanton Redevelopment Agency’s ability to issue bonds without voter approval.
On March 1, 2011, the Stanton Redevelopment Agency hastily issued $27.81 million of bonds. Interest rates on the bonds ranged from 4.85 percent to 9 percent. The lower rates applied to relatively small portions of the bond issue maturing in the first seven years. Over $17 million of the bonds, maturing in 2030 or later, paid the maximum 9 percent rate, while another $5 million maturing between 2019 and 2025, carried rates of 7 percent or higher.
At the time, 30-year U.S. Treasury bonds, generally considered the safest bonds, yielded around 2 percent. Stanton’s longer-term bonds carried a premium 7 percent above that risk-free rate. In 2011, S&P rated the Stanton Redevelopment Agency A-, several notches below AAA, but still well within the investment-grade range.
But the deal was worse for Stanton taxpayers than even the high coupon rates suggest.
NOT SUCH A DEAL FOR STANTON
First, as an incentive to buyers, Stanton’s RDA sold the bonds at a steep discount. Investors paid less than 100 cents per dollar of face value. For example, $8.05 million of Series A bonds maturing on December 1, 2040, were sold to investors for 95 cents on the dollar. So, although these bonds carry 9 percent interest, their yield is actually an even higher 9.5 percent.
The fact that this arrangement was good for bond investors and not so good for Stanton taxpayers is illustrated by trading in the Stanton RDA bonds. Recently, the 2040 bond originally priced at around 95 was trading in excess of 126. An investor who purchased $10,000 (face value) of the bonds in 2011 for $9,500 could now sell them for $12,600 – netting a tidy profit of $3100 in addition to the $900 in annual interest payments he received.
Overall, discounts on the 2011 bonds totaled $921,749. So instead of bringing in the face value of $27,810,000, the RDA received only $26,888,250 from investors.
But the RDA actually received even less than that: it also had to pay so-called issuance costs. These costs are fees – points on a mortgage and other closing costs in a home sale – that a municipal bond issuer pays third-parties involved in the deal. Information in the bond’s Official Statement and the State Treasurer’s new DebtWatch web site shows Stanton taxpayers paid nearly $400,000 to third parties:
|Underwriter||De La Rosa & Company||$ 192,108|
|Financial Advisor||Harrell & Company Advisors, LLC||67,000|
|Bond Counsel||Jones Hall||67,500|
|Disclosure Counsel||Quint & Thimmig LLP||25,000|
|Rating Agency||Standard & Poor’s||14,000|
|Trustee||Bank of New York Mellon Trust Company||5,000|
|Total Issuance Costs||$399,108|
Those costs of issuance further reduced to $26,489,142 the cash available to the Stanton RDA.
Between now and 2040, the Successor Agency will have to pay back the amount borrowed (including discount and issuance costs) – plus interest amounting to $41,835,775.
When you take out a new mortgage, the originator shows you the Annual Percentage Rate (APR) on the money you are borrowing. This rate reflects both interest and fees. In some cases, the State Treasurer’s web site provides the municipal bond equivalent to APR in the All-In Total Interest Cost, or the All-in TIC.
The Treasurer does not have the figure for Stanton, but we were able to calculate it. The 2011 Stanton bonds have an All-In TIC of 9.25 percent.
In a discussion with the city’s financial advisor, we learned that the bond financing was so costly because interest on the bonds is taxable. While most municipal bonds are exempt from federal income taxes, the Stanton RDA bonds could not qualify for the tax exemption because the planned use of proceeds did not meet IRS qualifications. (Interest on the bonds, however, is exempt from state taxes).
BUT WAIT! THERE’S MORE!
But the deal for Stanton taxpayers and residents has been even worse than these numbers indicate. As a protection for investors, the RDA was required to keep over 10 percent of the remaining proceeds — $2,823,292 – in a reserve account. Money in the reserve account must be kept in safe, liquid, low-yield investments and are thus not available for community investment.
The remaining proceeds were placed in two funds that could be invested. $13,054,810 was deposited in a Housing Fund which was “expected to be used by the Agency for the acquisition of up to 29 of remaining 41 housing units in the Tina/Pacific neighborhood, and associated relocation costs, for replacement with up to 161 new replacement affordable housing units.”
Another $10,611,039 was deposited in a Redevelopment Fund, which the agency could use to finance “park rehabilitation or expansion, and the Agency’s business assistance program.” The bond documents also state: “However, the proceeds may be used for other purposes allowed under Redevelopment Law, including making payments to the State under SERAF [the Supplemental Educational Revenue Augmentation Fund which allows sharing with school districts] or similar legislation or funding additional costs of the Agency’s Low and Moderate Income Housing Fund programs, including funding any difference between the amount available for and the amount required for the Tina/Pacific neighborhood project described above.”
While this language allows a lot of discretion, the primary purpose of the bonds was to redevelop the area between Tina Way and Pacific Avenue in the Northeast area of the city. As this July 2015 Google Street View image shows, not much progress has been made.
The neighborhood appears little changed since the Orange County Register reported in February 2012 that the city’s housing authority was planning to push forward with redevelopment despite the state’s decision to terminate redevelopment agencies.
According to the City’s financial advisor, the Successor Agency to the Stanton RDA has been unable to spend the bond proceeds because of state restrictions. These restrictions were recently relaxed with the enactment of SB 107 which will allow the agency to spend the proceeds in the housing fund. It remains to be seen when, or even whether, this parcel can be redeveloped with the remaining funds — or whether the city will have to look for new money to continue this project.
Marc Joffe is the President of the Center for Municipal Finance and a California Policy Center policy analyst. Marc’s research has been published by the California State Treasurer’s Office, the Mercatus Center and the Haas Institute for a Fair and Inclusive Society at UC Berkeley among others. Previously, Marc was a Senior Director at Moody’s Analytics. He earned an MBA from New York University and an MPA from San Francisco State University.