On November 17, State Treasurer John Chiang launched a new web site that provides information on bonds issued by California state and local governments. The site, at http://debtwatch.treasurer.ca.gov, has detailed data on over 50,000 bonds sold to investors over the last thirty years.
In many cases, the Treasurer reports detailed cost of issuance data not previously available. Costs of issuance are roughly analogous to points you pay when taking out a home mortgage. They are funds paid by the government to various financial service providers that are deducted from bond proceeds – and thus not available to fund whatever public purpose motivated the bond issuance. Just as individuals hope to minimize points they pay on their mortgages, governments should try to economize on bond issuance costs.
While examining the new cost of issuance data, one school district bond in Fullerton (Orange County) raised an eyebrow. For this issue, the Treasurer’s data shows total issuance costs equaling 19.19% of bond principal. Since no one in their right mind would pay 19 points on a home mortgage, this case seemed worth investigating.
Fortunately for Fullerton taxpayers, the situation isn’t quite as bad as the data implies – but it still merits taxpayer scrutiny. The bond was one of two issued by Community Facilities Districts to refinance previously outstanding bonds that paid higher interest rates.
About 15 years ago, developers created new communities at Amerige Heights and on the site of a former oil field at the northwest corner of Bastanchury Road and State College Boulevard (redeveloped by Van Daele Homes). Because school aged children would be moving into these new communities, additional elementary and high school facilities would be needed. Consequently, the Fullerton Elementary and High School districts formed special districts – known as Community Facilities Districts (CFDs) or Mello-Roos districts – to issue bonds for new infrastructure and to levy special taxes on the new homeowners to service that debt. The original bond offering documents can be found here and here.
In 2013, the school district decided to refinance the CFD bonds to take advantage of lower interest rates (see pages 69-87 of the agenda packet at http://www.fullertonsd.org/wp-content/uploads/2013/10/agenda_060413.pdf). The overall result was lower debt service costs and thus lower property taxes for residents in the two developments.
But the tax savings were not as much as they could have been because intermediaries charged the CFDs over $470,000 to refinance the bonds – or 2.87% of principal. This rate is considerably higher than the 1.02% average I found in a recent study of nationwide municipal bond issuance costs.
A summary of the issuance costs can be found in the offering materials for the 2013 bonds available at http://emma.msrb.org/EA549490-EA428291-EA824970.pdf. The relevant table from that document is shown here:
The new Treasurer data provides additional detail, while allowing us to see who actually received the issuance fees. Based on this new information, I created the more detailed table shown below:
|Type of Cost||Service Provider||Amount|
|Financial Advisor||Dolinka Group LLC||75,153.13|
|Bond Counsel||Stradling Yocca Carlson & Rauth||70,000.00|
|Rating Agency||Standard & Poor’s||17,000.00|
|Bond Insurance||Assured Guaranty||76,924.01|
|Total Costs of Issuance||$473,503.05|
The underwriting, financial advisor and bond counsel fees all seem generous – especially when one considers that this was a refinancing as opposed to a “new money bond” in which additional analysis is often required.
Especially galling to this former rating agency employee is the bond insurance cost. Because Standard & Poor’s gave the CFD a relatively weak single-A rating, the district apparently decided that it needed bond insurance to hold down the interest rate (since investors typically expect more interest at lower ratings). When the bonds were issued, S&P rated the insurer, Assured Guaranty, AA- which is two rating notches higher than that assigned the district.
Defaults among California educational districts are quite rare, especially because most of their bonds are secured by specific property tax levies. By contrast, insolvencies and defaults among bond insurers were quite common during the financial crisis as I discuss here. So the idea that Assured Guaranty is safer than Fullerton is dubious at best. But it is this dubious theory that cost local property taxpayers an additional $77,000.
Some of those who’ve gotten this far may be wondering how we got from a 19.19% cost of issuance rate in the Treasurer’s database to the 2.87% rate quoted in the foregoing analysis. As best as I can tell, the analyst who reported the Fullerton bond data to the Treasurer misallocated some costs between the smaller Van Daele bond and the larger Amerige Heights bond. As noted on the new web site, the data is unaudited and thus needs to be read with care.
But this is a small quibble. Treasurer Chiang has given us a terrific resource for holding bond issuers and the financial industry more accountable to taxpayers. As far as I can tell, nothing like this is available anywhere else in the US. It will require effort to learn how to interpret and use this data, but I believe that many activists and researchers will find the effort worthwhile.