Certificates of obligation fund Austin courthouse after voters rejected bonds

Three and a half years after Travis County, Texas, voters rejected $287 million of bonds to build a new civil and family courts building in downtown Austin, the county has the money in hand and is proceeding with construction.

Using tax-supported certificates of obligation that do not require voter approval, the county closed last month on a $330 million issue rated triple-A by Moody’s Investors Service and S&P Global Ratings.

A rendering of the Travis County, Texas, courthouse in downtown Austin, financed in 2019.

The use of such certificates may be curtailed by Texas lawmakers. The timeline for the Travis County project was already impacted by earlier bond legislation.

Under House Bill 1378 adopted by the Texas Legislature in 2015, local governments are required to wait three years before issuing debt for a project voters had rejected. That bill arose out of a controversy in the affluent Houston suburb of Montgomery County, where county commissioners authorized $30 million of COs less than a year after voters defeated a $200 million bond proposal for the same project.

At a Travis County Commissioners Court meeting in January at which the COs were approved, Commissioner Gerald Daugherty pointed out that the county had waited enough time to issue the certificates and was doing so legally.

“This is not something we take a great deal of pleasure in doing when the voters were asked and said no,” Daugherty said. “There are a number of people who are really going to take offense to what we are doing. But as elected officials we have to do the right thing, and the right thing to do is to furnish a facility where we can carry on the business that we are statutorily required to do.”

On its website for the project, the county explains why it went ahead with the financing despite voters’ disapproval.

“When the voters rejected the proposed project in 2015 because of its cost and location, the Commissioners Court listened to their concerns, realizing that the downtown property was more highly prized by private developers than initially thought,” the county said. “The Commissioners Court responded by leveraging the value of the property at 308 Guadalupe through a competitive bid by ground leasing it to the private sector and bringing in $430 million over 99 years in lease payments (or approximately $72 million in net present value). This revenue to the county will help offset costs and reduce the impact on taxpayers.

“The county’s fiscal stability makes this an opportune time to move forward with this long overdue project.”

Construction is expected to take three years, with the Hunt Companies and Chameleon Group Holdings as joint-venture developers and Hensel Phelps as the designer and builder.

The engineering and construction firms have collaborated on several similar projects including the Lindsey Flanigan Courthouse in Denver and U.S. Courthouse in Honolulu.

The law firm of Norton Rose Fulbright represented a syndicate of underwriters, led by Citigroup Global Markets on two aspects of the debt issue, $330 million of certificates. The proceeds of that sale will be used to buy the court building over time in installments.

The Norton Rose public finance team was led by Stephanie Leibe of Austin with assistance from Matt Lee of San Antonio.

The second component of the transaction centered on securing private construction financing. Norton Rose lawyers represented the construction lender, KeyBank National Association, in securing a revolving loan facility that allows the bank to finance construction milestones for the project. That transaction closed on April 9, a day after the certificates went to market.

“This transaction exemplifies Norton Rose Fulbright's ability to oversee and shepherd through complex, multiphase P3 financings,” the firm said.

With final maturity in 2039, certificates bearing 5% coupons earned yields of 2.64%, according to the official statement.

PFM Financial Advisors was the municipal advisor on the deal, with the firm of Bracewell as bond counsel and disclosure counsel.

Although the participants described the new courts building as a public-private partnership or P3, some stakeholders questioned that description.

“We recognize the need is there and that it should be done as soon as possible,” DeLaine Ward, executive director of the Austin Bar Association, told the Austin Monitor. “But I thought this was going to be done as a public-private partnership, at least 50-50. I am really surprised by this, very much so.”

According to the county, the deal is deserving of a P3 designation because the private sector partner provides suitable land and constructs the building all in one step.

The courts building will be built at a site selected by the private partners operating as Travis County Courthouse Development Partners LLC. The courthouse will replace the undersized current courthouse built in 1931, when the county had fewer than 100,000 residents.

The original courthouse was designed to have just four courtrooms but has been expanded to 19, for a county that now has 1.3 million people, officials said.

“The overcrowding of 19 courtrooms in a building originally designed for 4 courtrooms makes a trip to the courthouse a high-stress event, when people are already anxious due to the nature of their cases,” the county said in explaining the need for the new facility. “The current situation is dire and a potential failure to provide for the justice system’s needs is not an option.”

Once the new courts building is open, the county plans to spend up to $100 million restoring the original courthouse, now named for a civil rights pioneer, Heman Marion Sweatt, who won the first legal battle over an African-American’s admission to the University of Texas law school, in the 1940s.

The rapidly growing and increasingly urban county faced no difficulty in maintaining its top credit rating, according to analysts.

“Economic growth continues to bolster the county's property tax receipts, which are the primary source of revenue, and a very strong framework of budget management and long-term planning should support stable operating performance over the near-to-medium term,” S&P analyst Amahad Brown noted. “Ongoing growth within the county necessitates the continued need for debt to maintain infrastructure and meet increasing service demands; however, we believe the county will continue to issue debt within the guidelines established in its debt policy to ensure that debt issuance remains commensurate with economic growth.”

In the current legislative session, lawmakers are considering lowering the current cap on tax revenue increases to 2.5% from the current 8% and including revenue raised to pay for COs under the cap. According to the Texas Municipal League, that provision could curtail use of COs.

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