A climate of rising interest rates for municipal debt and declining property tax revenues wouldn’t seem to be a market smart businesspeople would rush to sell into – moreover, without competitive bidding. But that’s just what the City of Santa Clara did last week.
The City Council voted unanimously to sell up to $35 million in bonds for the Bayshore North redevelopment area for “major refurbishment” only tangentially related to the proposed 49ers stadium.
With that move, Santa Clara joins the herd of California cities racing to sell tax allocation bonds – repaid by incremental property tax revenue – just in case the state legislature shuts down the state’s 65-year old redevelopment agencies.
The $25 million capital improvement program includes work on the Santa Clara convention center, existing and planned parking garages, David’s Banquet and Meeting Facility, fire stations No. 6 and 10, the Youth Soccer Park, Martinson’s Day Care Center, and the planned North Bayshore branch library.
Any additional money raised will go to the City’s $40 million commitment to the 49ers stadium project. Issuing costs – about $500,000 – will be paid from the bond sale proceeds. City staff expects the bonds to go on the market in May.
The bonds will likely offer purchasers interest rates between 7 and 8.5 percent, said City Finance Director Gary Ameling. This is the going rate for California redevelopment bonds, according to the LA Times, which reported that since the beginning of the year, 16 RDA bond issues had rates above 9 percent. Overall, California municipal bond sales have dropped by 75 percent so far this year.
Tax allocation bonds also face pressure from declining property taxes. For example, last month Moody’s Investment Services downgraded the San Jose RDA’s non-housing tax allocation bonds, reports market analyst California Municipal Bond Advisor, which predicts the downgrading trend will continue into 2013. A few weeks ago, Moody’s also downgraded Cathedral City RDA bonds two levels to Baa1 from A2 because of declining assessed values.
Should Santa Clarans worry? Not according to the plan’s architects.
“These bonds are not a debt of the city,” Finance Director Ameling reminded listeners Tuesday night. However, it’s difficult to imagine circumstances where the Santa Clara City Council (which is also the Santa Clara Stadium Authority) wouldn’t rescue an insolvent Stadium Authority – as a default by that agency would have calamitous potential for the City’s credit and bond ratings, as well as on tax revenue from the mammoth new $937 million stadium.
The new RDA bonds will be sold directly to the City’s underwriting firm, “to get around” California law about selling bond issues openly at competitive bid (based on interest rate offered), according to attorney Chick Adams of Jones Hall, disclosure counsel for the City’s bond financing team. “Almost all the agencies issuing bonds since the beginning of the year have done this.”
In 2009, the state legislature made it easier for cities to make so-called “no-bid” bond issue deals on the grounds that banks weren’t participating in competitive auctions. Critics say that no-bid deals raise taxpayers’ costs because bonds with higher interest rates are easier to sell.
Competitive bidding saves taxpayers money – 17 to 48 basis points – according to analysis by business news company Bloomberg. “The savings mean $1.7 million to $4.8 million less in interest payments on the life of a 10-year bond,” explain reporters Michael Marois and William Selway.
If all this isn’t enough to keep civic-minded citizens awake at night, here’s more food for thought. The RDA closure bill currently being considered by the state legislature extends to three years – from three months – the period in which the state can review municipal bond issues made after January 1, 2011 “to determine the validity or legality of any issue, document, or action.”
Carolyn Schuk can be reached at email@example.com.