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OC's Measure M Treats Some Homeowners More Equally Than Others

Orange County voters are being asked to approve over $2.4 billion in new school bonds. The largest bond: Capistrano Unified School District (CUSD)’s $889-million Measure M.

The new CUSD bond would be serviced by property owners in most of the school district, but not quite all of it. One community, Rancho Mission Viejo, won’t be voting on Measure M and won’t be paying the new taxes if it passes. CUSD’s Measure M web page says the new community is being excluded on the grounds that it won’t have a school until Fall 2018, when Escenia Elementary will begin serving Rancho Mission Viejo residents. But this ignores the fact that community members can send their children to Tesoro High School, which will receive upgrades from Measure M proceeds.

In reality, district officials removed Rancho Mission Viejo from the Measure M bond district to avoid a political showdown with powerful, sophisticated real estate developers there.

In a June 22 meeting of the district board, Trustee Jim Reardon, a bond opponent, noted that “there are areas of the school district that are large and undeveloped, and privately owned, and we are going to face opposition from the landowners in those areas.”

“Then carve them out,” responded Trustee John Alpay, a Measure M supporter.

Alpay had earlier argued for using a “Swiss-cheese model” to design a district in which well-organized opposition might torpedo the district.

“You need to go through, you need to start with the whole district, and then you need to start cutting out those areas that you know that we could live without in terms of finance,” Alpay said, according to transcripts of that meeting. “They’re not gonna support it. Any rational political person is gonna do that … Get rid of them. Carve them out. There is no reason to have them in there. And I could make the same argument of other parts of the district, and that’s what we should do. I’m not saying it should be, or should be Mello-Roos districts, but this idea of one unitary is wrong. The idea of six is also wrong. It has to be something in between.”

But to exclude Rancho Mission Viejo and other potential opponents, the CUSD board needed to create a special district for the purpose of enacting the bond. In July, with a Rancho Mission Viejo Co. official in the audience, officials approved the bond district – minus the Rancho Mission Viejo Co.

Known as Capistrano Unified School District School Facilities Improvement District No. 2 (SFID No. 2), the new district will be layered atop a hodgepodge of existing special taxing districts within CUSD. The school district already has an SFID – SFID No. 1 – and it also has 10 Community Facilities Districts (CFDs) – also known as Mello-Roos districts.

Creating and administering special districts imposes extra costs. Also, special district bonds may attract lower ratings and be harder to sell to investors than more easily understood and better diversified district-wide general obligations. This should be a concern for CUSD, most of whose SFID No. 1 bonds carry a surprisingly low A+ rating from S&P – four notches below the agency’s maximum AAA rating.

CUSD is unusual in that some homes can be in multiple districts – the existing SFID, the proposed new SFID and a Mello-Roos district. Such is the case for homeowners in Whispering Hills Estates. As the 2015-16 tax bill for one lucky owner shows, total taxes are almost $16,000 on an assessed value of $837,000. About $7250 of the taxes go to servicing two SFID bonds (listed as CAP USD ID1) and the Mello-Roos obligation (CFD 2005-1).

More expensive properties draw even higher tax bills. This second tax statement, for a property assessed at $1,080,000, shows a total of $19,000 in taxes.

And these taxpayers will be paying more in the years ahead – with or without Measure M. The Whispering Hills Mello-Roos district just issued a new bond that will further increase the Mello-Roos tax there. In 2016-2017, the CFD tax alone will range from $6820 on the smallest homes to $9500 on the largest (see page 21 of the bond document).

According to CUSD, Measure M will add $41.81 of new taxes per $100,000 of assessed valuation in the first year after enactment, climbing to $42.99 per $100,000 in fiscal 2032-33. By law it can rise no higher than $60 per $100,000. This may not sound like much – until you consider the impact on a property over the 30-year typical life of a bond program. At $42 per year for 30 years, total taxes are $1260 per $100,000 of assessed value. If your house is worth $1 million – not atypical for the area – the lifetime tax is $12,600. And this is on top of the hefty tax bills CUSD residents already pay.

Finally, it is worth noting that the district is issuing the bond after years of flat to declining enrollment. In the 2011-12 school year, 50,538 students were enrolled in CUSD. In 2015-16, the figure had fallen to 49,120 (as shown on page A-2 of the bond document mentioned above). While new construction may stall this trend, it seems unlikely that the area will be hit by a wave of new students, making one wonder whether it would be possible to get by on something less than $889 million in new construction.

Marc Joffe, a policy analyst with the California Policy Center, was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

 

Hoping to avoid citywide vote, Stanton officials quietly issued high-interest bonds

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:

 

SERVICE COMPANY COST
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
Other 28,500
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.

 

Lots of Space

Lots of Space

 

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.