Regional News

Bond Bank Bid Raises Eyebrows

LOS ANGELES — A proposal to create a bond bank in Washoe County, Nev., has critics worried that the county would needlessly put its double-A credit ratings at risk.

The creation of a bond bank would enable Nevada's second most populous county to sell bonds on behalf of local municipalities, attaining a lower interest rate for the entity, which would then pay the county for the annual debt service.

The County Commission approved the ordinance on first reading, with a final vote still to come.

Standard & Poor's rates Washoe's general obligation bonds AA. Moody's Investors Service downgraded the county's rating to Aa2 from Aa1 in September.

"My issue is that we have a fiduciary responsibility to the citizens of Washoe County," said County Commissioner Kitty Jung. "To me, there are a lot of downsides to creating a bond bank and not a lot of upsides."

Jung and Commissioner Bonnie Weber voted against the ordinance during its first reading on Nov. 8. It passed in a 3-2 vote and comes up for its second and final vote on Dec. 13.

"The issue is whether the county is willing to put up its bond rating to issue paper to give to other projects," said Robert Barone, a partner, economist and portfolio manager at investment advisory firm Universal Value Advisors, which is based in Reno, the Washoe County seat. "How is issuing paper on projects for another municipality advantageous to the county? There is only the disadvantage of what happens if other people don't pay."

Barone posed the question this way: If your neighbor had a lousy credit rating, and you have a great credit rating, would you borrow money from your bank to lend to your neighbor at the same interest rate you received from the bank?.

The ordinance originally proposed in May was crafted to facilitate a merger between the county's Department of Water Resources and the Truckee Meadows Water Authority by refinancing some of the DWR's debt, said John Sherman, the county's finance director.

The TMWA's water revenue bonds carry ratings of AA-minus from both Fitch Ratings and Standard & Poor's, and Aa2 from Moody's Investors Service.

Jung said she successfully worked to have the ordinance narrowed so that it only applies to the water authority, and not to any other municipalities in the county, but she still considers it too risky.

"As far as I'm concerned, it puts taxpayers at risk with no reward involved," Jung said. "The bottom line is I think it is unnecessary in uncertain times."

The county's plan is to issue new bonds so that $26.1 million of outstanding DWR bonds can be retired, Sherman said. The bonds were part of a $65 million issuance used for a variety of projects, including a water treatment facility to service expected growth for development that failed to materialize when the economy crumbled, he said. The treatment facility was never completed.

The county has to retire the bonds before the merger goes through because DWR revenues are used to back the bonds, according to Sherman. The TMWA would repay the new bonds.

The agency, a joint-powers authority formed by Washoe County and the cities of Reno and Sparks, is the largest water provider in the county. The DWR has 19,000 customers in unincorporated areas and on the fringes while the TMWA has 90,000 customers, according to Sherman.

"We are trying to merge those two together to get efficiencies," he said. "That is the primary reason for bringing the ordinance forward."

When the county issues bonds they are issued through the state in a revolving fund, Sherman said. The bonds would be negotiated with the state substituting the TMWA as the payer of the debt, he said.

Clark County is the only county in Nevada that has created a bond bank, and that was years ago.

Clark officials created their bond bank to finance debt for the Southern Nevada Water Authority, Sherman noted.

The county's double-A level ratings would result in a net savings of $1.6 million in interest costs over the life of the bonds, Sherman said. The TMWA also would not have to borrow an additional $2.3 million to create a bond reserve if it had to issue revenue bonds. The total savings would be $3.9 million.

According to Barone, the authority could also use the Washoe County bond bank to refinance $370 million of existing TMWA debt without returning to the County Commission for approval. He said the $3.9 million in interest savings only saves water customers about 20 cents a year on their bill over 20 years.

If the county refinanced the $370 million of the water authority's debt, it would double the $355 million in outstanding debt the county is currently responsible for. According to its 2010 financial statements, the agency has total outstanding bond debt of $456 million plus $78 million in outstanding commercial paper.

Jeff Tessier, the TMWA's chief financial officer, said the authority has no intention of refinancing any of its outstanding revenue bond debt through the county bond bank. He did not know if the agency would be able to refinance the debt through the bond bank without seeking county approval at some point.

"The advantage is to refinance the existing Washoe County debt related to their water resources division," Tessier said. "It's more effective to refinance through the bond bank — and that's the sole purpose of the bond bank."

Barone still contends that passing the ordinance opens a door that should stay shut. He added that the ordinance could be broadened later and political pressures could be used to sway commissioners to take on other municipalities' debt, like that of Reno or the Reno Redevelopment Agency, both of which have been struggling from high debt loads in the face of reduced revenue.

Under Nevada law, Washoe could lend up to $2 billion or 15% of the county's assessed property value through the bond bank. The RDA, in danger of defaulting on $35.7 million of debt, contends that Washoe County owes it $2.9 million under a 1987 statute. The county is currently negotiating with the RDA on the issue.

"The county commissioners don't know how to be a bank — and they shouldn't try when experienced bankers can't even manage to do it well in the current economic environment," Barone said.



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