City’s certificates of participation amount to a costly loan
The city of Grand Junction is finally set to seat a new city council after an election where two of the open seats were of interest to only one person in each district while an at-large position was sought by five quite disparate individuals.
Then, there was an abrupt disappearance by one of the council incumbents but this is the city of Grand Junction and people disappear mysteriously all the time. We had a city manager that went poof one night and reappeared in Arizona with the chief of police.
The vacant council seat was then filled during one of the more unusual proceedings seen in those chambers, and still a few saucer-eyed optimists continue to give the new council the benefit of the doubt. However, it’s a hard-knock life down here at the bottom of the editorial page and it’s made me a bit jaded. So I have few doubts about what to expect.
With that in mind, let’s examine a scheme creaking into action at Fifth and Pitkin in the form of the new public safety complex and, in the interest of brevity, let’s just explore the financing. Questions have arisen about the propriety of the “certificates of participation” that were used as financing instruments for this project. They sound like something youngsters receive in grade school for participating but not winning, and in this case, that’s also probably true.
The certificates appear to some to be mainly used to circumvent legal requirements for the raising of debt by public entities in Colorado, even though they have been upheld by the courts as a legal means of public financing.
They are loosely described as being financial instruments that allow municipalities to borrow money without incurring traditional bonding debt. They create a sort of economic mirage whereby a public entity issues certificates that seem very like traditional bonds, except the entity is offering to build a project and become a renter to the bond issuer’s landlord.
The city of Grand Junction, after being stung by the voters’ overwhelming repudiation of its $98 million project in 2008, evidently began casting about for ways to finance a smaller project without seeking voter approval. This seemed like an answer.
The city will essentially build something for its future landlord in return for a guaranteed lease payment to the investor. In this case, that sum is $2.2 million per year, with an agreement binding the next 15 city councils to its terms. In return for the $36 million “borrowed,” the city will pay back nearly $66 million. This gambit was also employed at practically the same time to raise over $7 million for changes the city wanted to make at Suplizio Field.
In short, the city’s landlord, now Zion’s First National Bank, provides the funding for a new building in return for a generous guaranteed lease payment over the aforementioned 30 years. Another bit of news that may distress some is that money from the $787 billion 2009 American Recovery and Reinvestment Act are part of the transaction and were used to pay a portion of the interest above the $2.2 million per year. Without the stimulus money, the payments would’ve been $3.43 million, so we’re getting quite the bargain with our borrowed money.
In this fashion, stimulus money, fresh from its trip to China, is helping to invigorate our economy in much the same way it did the nation’s.
In one of the sadder moments during this process, a council member commented that he thought the percentage rate the city was paying for this transaction was “great.” Let’s take a look at that by examining a report prepared by Invesco Van Kampen, who now holds these certificates/bonds, as part of its portfolio. The firm specializes in bonds created by the stimulus package.
Of the 41 instruments contained in this portfolio, the certificates issued by the city of Grand Junction are paying the second highest rate of interest, topped only by the California Municipal Improvement Corporation of Los Angeles. We are all aware of the exciting investment environment presented by California and the city of Los Angeles, so we can assume they pay for the risk of lending them money. The interest rate on the city of Grand Junction certificates is 7.65 percent while that of the Los Angeles bonds is 7.84 percent.
If this is not borrowing, then let’s miss a few payments and see who takes possession of the new buildings.
Rick Wagner offers more thoughts on politics at his blog, The War on Wrong.