Wednesday, August 13, 2008

A Quick Lesson On Oro Valley Bonds By John Musolf

Thanks to John for sharing his vast knowledge and clarifying the "Bond Issue" in layman's terms for all of us.
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There is a lot of confusion about the use of bond issues in Oro Valley. Perhaps this will offer some clarification.

A municipal bond is a bond issued by a state, city, or local governments for their day-to-day and for specific projects that they might be undertaking (usually pertaining to development of local infrastructure such as roads, sewerage, government buildings, etc.)There is no voter (taxpayer) approval to issue this type of bond

Municipal bonds are sold to the investing public. Municipal bonds pay interest to the bondholder over 25 or 30 years. The bonds appeal is that the interest is exempt from federal taxes and in some cases state or local taxes. The interest is usually recorded as annual debt costs by the municipality (such as the Town of Oro Valley (TOV) and is paid by taxpayer money out of the general budget. This means other priority capital projects such as roads, water development, etc. may not occur since there is not enough taxpayer money in the budget to go around for all projects (perhaps even for day-to-day town operations).

The other danger is that in bad economic times, the TOV could default on these municipal bonds because of insufficient funds to go around (such as receiving less state shared tax revenue). As of June 30, 2007 there are 12 outstanding bonds issued by TOV for many projects for an outstanding principal total of $75,755,000. This is reported on the Report. There is an additional bond issue that is estimated to occur for $26,365,000 for the Municipal Operations Center in 2010 to bring the total to $102,120,000.

These type of bond issues could be manipulated. For example, if money somehow got diverted for other uses, then the TOV could simply issue some additional bond issues (called excise tax revenue refunding bonds) to pay off the shorted (diverted) bond issues with new bond issues without voter approval.

General obligation bonds are also a type of municipal bond. This is the kind of bond that TOV has on the ballot for November 4, 2008. The major difference is that general obligation bonds are issued with the belief that a municipality (TOV) will be able to repay its obligation through direct taxation (such as a property tax). There is little danger in default on these bonds since property taxes can be increased. Municipal bond investors like this added security.

The TOV is seeking voter approval to create a secondary property tax to fund the general obligation bonds for the Naranja Town Site. There is no absolute guarantee that these direct tax monies could not be manipulated but the risk is somewhat less. However, don't forget the capability of the TOV to issue other types of municipal bonds for rescues without voter approval still exists. Also, since this is projected to be only the first of many phases for the Naranja Town Site expect some more taxes. Also, this does not take in to account other opportunities [ed note: and may preclude], such as a branch of the Tucson Art Museum or bringing CAP water to Oro Valley for bond issues!

Originally, the TOV Council wanted to spend close to $150 million dollars for general obligation bonds for the entire proposed NTS. This would not have been possible! Under Arizona Law, municipalities may issue general obligation bonds for specific purposes such as water, waste water, artificial light, open space preserves, parks and recreational facilities up to an amount not exceeding 20% of the secondary assessed value. This would allow the Town of Oro Valley to bond for an amount of $92,642,349 (not $150 million) based upon the most recent secondary assessed value of $463,211,743.

John Musolf

11 comments:

Zev Cywan said...

For anyone who wishes to examine the applicable demands by the State of Arizona's Statutes relative to General Obligation Bonds, go to the AZ Legislature website (www.azleg.gov) and scroll to HB 2585, "General Obligation Bonds Requirements". Please note that the TOV has been contacted and asked to ensure that the [procedures and disclosures outlined shall be enforced as dictated]; The Town Attorney, the Town Council, and some pertinent members of the Town Staff were advised at an earlier date that [many of us were 'uncomfortable' with some of the past performances of the Town in participitory matters requiring an informed citizenry]. Assurances have been received (by me personally), in a very receptive manner, that [the State of Arizona requirements shall be fully observed in this matter].

For those who wish a complete and detailed review of the subject, please go to the above mentioned site and read the statute (be sure to 'hit' all of the 'add-ons'); otherwise, John does gives an excellent presentation of this matter.

voice of reason said...

Thanks, John, for your informative data. Keep digging.

cyclone1 said...

Zev,

You do realize that HB 2585 was vetoed -right?

voice of reason said...

Mr. Musolf's comments are helpful for those interested in the subject. It didn't include comments relative to how the principal bond repayments would be made. Some bond agreements call for annual sinking fund payments while others are merely refinanced and rolled over.Eventual repayments are deferred while total municipal debt grows. This may be in OV's future.
But an issue not addressed are the huge annual costs which will be incurred for significant personnel, equipment, utilities, & administration.These costs are not yet definitive, nor are they disclosed or understood.
Also, by focusing attention of the site's cost as "phase 1", the full impact of future phases is softened. Most informed judgment recognizes that future phase estimates are highly prone to overruns and inflation not anticipated nor discussed in seeking initial approvals.
All of this begs the question of why financing is even being considered for a project which is questionable to begin with and which will impact we taxpayers for years. Voters are not being informed adequately and are risking being "hoodwinked" again, ala the Vestar project.

artmarth said...

We appreciate the comment from a new blogger---"Voice Of Reason," and would acknowledge the issues addressed.

We would remind all of our readers that this is only Phase 1,without any outdoor theater and without any aqua center but still at an exorbitant expense of $48.6M.

The other issue raised by "VOR" is the fact that the annual Operation & Maintenance costs are not really known, and probably under estimated.

The analogy to Vestar is also quite appropriate, although there is one variable: We now have a majority on the council with a lot more sense and a lot more fiscal responsibility.

Nombe W said...

the above comments demonstrate well reasoned, intelligent conversations regarding the park.

We have to get this information beyond the love blog!

The voters are well on the way to being fooled again.

The Zee Man said...

Thanks for the thorough briefing, John.

One added point: There is an (unstated) cap on the amount of money a small municipality like Oro Valley can borrow.

Borrowing for a frivolous adventure, like the Naranja Town Site, brings the town closer to this limit.

The town may not be able to borrow, at reasonable rates, additional monies to fund important serious projects.

Zev Cywan said...

Cyclone1, when was that? I still find it as an active HB on the AZ Legislative website but revised for 2008. The particular section which I had, in the past, specifically addressed was A.R.S.Section 35-454(A)(1). Please help me(us)out here because it does seem logical that the document I have in my possession, though revised, appears to be valid. Thanks, Zev

cyclone1 said...

Zev,

The statutes that HB 2585 purported to amend are still valid (35-454, 35-455 and 35-473.01,but the bill itself was vetoed on May 20, 2008. You can read the Governor's veto letter here http://www.azleg.gov/govlettr/48leg/2R/HB2585.pdf and see how the bill progressed through the legislature here http://www.azleg.gov/DocumentsForBill.asp?Bill_Number=HB2585
Hope that helps.

Zev Cywan said...

Cyclone1, thank you for your clarification; very much appreciated! Unfortunately I still had the pertinent revised statutes within my data base under the HB 2585 'umbrella', thus my error. In the correspondance with those mentioned on my previous post, A.R.S.454(A)(1) WAS the object of my concern and had been, in it's finality, specified as such.

Again, thank you for your attentive indulgence; it's very much needed.

voice of reason said...

The Zee Man is very correct in commenting on the ability of OV to borrow at reasonable rates. The entire Muni market has been jeopardized by the collapse of the municipal bond insurers' loss of their own ratings due to their exposure to subprime loan insurance.
This simply means that a bond issue without insurance will require a lower rating(other than AAA) and result in a higher interest rate in order to sell to risk averse buyers.
So, as Zee Man points out, this all means that when serious needs for OV do arise in the future, the cost of paying premium rates on the extravagant park site bonds will come home to roost.
Are our current council members astute in these arcane but costly issues? I doubt it. Are our hapless voters? Oh please.