CHICAGO — Should the municipal market embrace a new national conduit finance authority as a welcome addition to the arsenal of financing options, or does it threaten state imposition of legislative priorities and policies on tax-exempt bond issuance?
Those questions were the focus of a webinar last week hosted by the Council of Development Finance Agencies and BNY Mellon on the growing popularity of multi-jurisdictional conduit issuers.
A handful of local, regional, and state conduits have some form of power to issue tax-exempt debt for projects outside their boundaries, often for a locally based borrower or for borrowers seeking to streamline the issuance process for projects in multiple locations.
While those types of transactions have not generated much controversy, the creation of the Wisconsin-based Public Finance Authority as a national conduit last year has produced strong reactions, especially from state-run conduits concerned that the new agency will usurp their legislative mandates.
“We are designed to provide a service,” said Liz Stephens, the PFA’s Wisconsin-based program manager and a participant in the informational webinar. Stephens argued that the agency is designed to “supplement” existing conduit capacity, not supplant it, and that local approval is required for all projects before a bond financing is approved.
“Local governments right now are struggling to maintain the services they are required to provide,” she said. “PFA provides an option, an option only, to help communities with the bond issuance process. … PFA is here to fill a void.”
The authority has so far issued bonds for projects in Colorado, Florida, Georgia, New York, and Wisconsin. Stephens said the authority provided the only means by which borrowers could access the tax-exempt market for several of the transactions.
In other cases, it has eased the process, lowered the cost, and helped borrowers overcome certain technical hurdles.
But representatives of two state-based finance authorities said they have sweeping powers and are best able to aid small to large borrowers seeking market access for projects that support their legislatively approved public mandates.
The creation of a national authority “is a solution in search of a problem,” said Illinois Finance Authority executive director Christopher Meister. “Conduit financing is a construct of federalism,” with the benefits of tax-exempt financing best delivered “through a state-constructed system of policies and procedures.”
He cited examples of specific state rules that promote policies such as the use of prevailing wages by borrowers.
Meister is concerned that a national agency that does not directly answer to an elected body could generate more troubles for the municipal industry at a time of heightened regulatory scrutiny and discussions over the continued existence of a federal tax exemption on interest earned on governmental and nonprofit borrowing.
“We want to ensure that state law is followed,” said New Jersey Economic Development Authority chief executive officer Caren Franzini.
“We are promoting state policies,” she said, including rules that impose financial analysis on certain development projects.
Franzini said her agency also offers an extensive toolbox that helps all borrowers, especially smaller ones, through its banking relationships and ability to provide financial guarantees.
The PFA is formally a subdivision of Wisconsin, established under legislation signed by former Gov. Jim Doyle last year. It is sponsored by the National Association of Counties, the National League of Cities, the Wisconsin Counties Association, and the League of Wisconsin Municipalities.
Its board is made up of five officials from local Wisconsin governments, plus two members from out of state.
The agency promotes its ability to issue tax-exempt conduit bonds for public and private entities nationally for projects with public benefits to promote economic development, industry, infrastructure, and affordable housing. Because of its national scope, the PFA can serve as a one-stop shop for projects that span multiple jurisdictions.
San Francisco-based attorneys with Orrick, Herrington & Sutcliffe LLP co-authored the Wisconsin legislation. The agency is modeled after the California Statewide Communities Development Authority, and like that agency, contracts with HB Capital Resources Ltd. to manage its operations.
Stephens is an employee of HB, as are a handful of other program managers used by the PFA.
Last week, a California lawmaker called for an audit of the CSCDA and another third-party state issuer over concerns about transparency, conflicts of interest and public benefit.
Critics — led by state Treasurer Bill Lockyer — have voiced concerns about the two conduit issuers for years because the authorities are run by private businesses yet work as government agencies.
The PFA has already prompted a legislative backlash from some states. Earlier this month, Washington Gov. Christine Gregoire signed a bill regulating the ability of out-of-state bond issuers to issue private-activity bonds for a project there. It’s mirrored after legislation approved last year in Illinois. Rhode Island is considering similar rules.
The Washington law requires an out-of-state issuer proposing to issue bonds for a project in the state to submit specified information to the relevant statewide bond issuing authority, and gives it a say over whether the project can proceed to a public hearing.
Local issuers must also report to the Legislature if out-of-state issuers apply to finance a project there.
The CDFA has no formal position on multi-jurisdictional issuance powers, but has formed a task force to track the subject and form a policy.
CDFA president Toby Rittner said during the webinar that while there are no questions over the legality of such powers, authorities must adhere to local, state, and federal laws in addition to adopting policies that promote transparency.
In polls conducted of the organization’s membership, Rittner said that oversight is a top concern, along with worries that local policies and missions could be violated by an outside conduit.
Rittner also said he eventually anticipates congressional involvement in the issues surrounding multi-jurisdictional issuing authorities.
