The Association for Governmental Leasing & Finance (AGLF) held its 33rd Annual Fall Conference this past November in Boca Raton, FL. During that meeting I had the honor and pleasure of presenting the AGLF’s Jay Terry Lifetime Achievement Award to my good friend and legal mentor, Jim Winn. Jim is a nationally recognized public finance attorney recently retired from the firm of Gilmore & Bell in Kansas City. A little more than 30 years ago, I asked Jim and his firm if they could help support our fledgling company in the relatively new business of municipal leasing. He jumped in with both feet and proceeded to build one of the most well-known and well-respected municipal leasing legal practices in the country. Jim is what I would call a quiet innovator. Along the way and without fanfare he was instrumental in constructing industry standard documents, comprehensive methodology for client support, and countless creative transaction structures that helped get the business done when others could not.
In addition to all of his support helping our business and others survive and profit throughout the years, early on Jim brought my attention to a benefit that made our work highly rewarding in a different way. While working on a unique transaction that was going to provide a much needed benefit to a substantial group of local citizens, Jim told me that one of the things he liked most about being in the public finance field was the aspect of providing a benefit to the public. Simply stated, we were helping people. We weren’t just helping people earn a profit or make a living. We were helping them live a better life as a result of receiving better public services and benefits being provided by our financing.
When money is provided to a state or local government through a municipal lease or similar financing, there is an overwhelming likelihood that it will result in a lifestyle improvement for the citizens served by that government. It may be something mundane that isn’t readily noticed, because many municipal services are taken for granted. Or, it could be something that has a profound effect on the lives of specific groups of people. New equipment might help improve the quality of the county roads. A new imaging department at the local hospital may eliminate the need to drive 50 miles to the next town for those services. Even something as seemingly nonessential as the construction of a municipal golf course can make a community a better place to live and more inviting to new business and industry.
The unbridled appreciation shown by city council members when they open that new golf course is priceless. The smiles on the faces of teachers, students and administrators when the school’s new computer lab is delivered will stay with you forever. Completing a facility financing for a state’s Division of Family and Children’s Services leaves you with the profound understanding that you have helped those who may be most in need. It could be argued that every municipal financing provides a benefit to the greater public of that particular jurisdiction. However, once in a while the municipal finance business affords the opportunity to participate in a transaction that provides a special sense of satisfaction usually accompanied by an adult dose of humility. The sensation is probably as close as you can get to feeling altruistic while still charging someone interest.
Honoring Jim at the recent AGLF conference caused me to reflect on some of those special opportunities I had in my career and to ask some of my peers in the business about their experiences feeling the heightened spirit of accomplishment derived from leasing and financing for public benefit. Here are three of those special stories.
In Denver, Mike Hark, with Hutchinson Shockey Erley & Co., was asked by Rocky Mountain Human Services (RMHS) to help restructure the agency’s $14.5 million tax-exempt bond issue used to finance its headquarters building, furniture and equipment. RMHS is a nonprofit organization serving nearly 10,000 individuals, including more than 2,000 professionals and 7,500 additional Coloradoans in nine district programs. They are dedicated to serving vulnerable populations throughout the Rocky Mountain West. RMHS is currently serving: children with developmental delays and disabilities; adults with cognitive and intellectual disabilities; adults who live with the effects of traumatic brain injury (TBI); military personnel and veterans who return from Iraq and Afghanistan with a TBI; veterans who are homeless or in jeopardy of losing their homes; families who are striving to break the cycle of poverty; professionals who seek to create meaningful employment opportunities for individuals with intellectual challenges; and professionals who seek to provide the highest quality services for individuals with developmental disabilities.
Helping RMHS take advantage of lower interest rates and eliminating previously required financial guaranty insurance and guaranteed investment contracts would free up substantial funds to apply to these programs. Unfortunately, the financing was under-collateralized due to capitalized interest and issuance costs in the original bond issue. The collateral deficit was stifling refinance attempts with traditional lenders and underwriters. Mike and the Hutchinson Shockey Erley firm were ultimately successful in finding a private placement investor who was comfortable with the security of a revenue pledge from RMHS. The resulting refinance is saving RMHS more than $3.5 million in present value savings in addition to relieving the nonprofit of many onerous covenants and restrictions.
Not surprisingly, in addition to producing a profit, the RMHS transaction has had a lasting and more profound effect on Mike and his firm. Mike and Hutchinson Shockey Erley have both become donors and Mike serves as a member of the fundraising committee for soldiers with traumatic brain injuries. This past summer they generated more than $35,000 for TBI as a part of the Denver Colfax Marathon. In this case, as in many, there was a multiplier effect on the public benefit provided by the financing transaction.
In 2013 Capital One Public Funding (COPF) was selected to finance the second early college high school facility (ECHS II) for the Las Cruces, NM, Public Schools (LCPS). Industry veteran Jeff Sharp sourced and managed the transaction for COPF. Jeff reports that the LCPS is part of a growing movement of U.S. public school districts that are developing early college high schools for their students. Students who complete the curriculum and graduate from an early college high school receive both a high school diploma and an associate’s degree from their local community college. The LCPS facilities are specialized and are located on land that has been leased to the LCPS by New Mexico State University for a nominal sum. LCPS opened its first early college high school in 2010 and expects its first class to graduate in 2014.
At these specialized schools the focus is on academics. ECHS students do not participate in typical high school-related extracurricular activities. The dropout rate for LCPS has historically been around 35%. To date the drop-out rate for its first early college high school is zero. District administrators attribute this positive development to many factors, not the least of which is the support and encouragement that all students receive from their classmates. In many cases the students who graduate from ECHS I and II will be the first high school graduates in their families.
ECHS II will open in the fall of 2014. It has been specifically designed to train students for healthcare careers or position them for further education in a healthcare related degree program. Upon graduation, ECHS II students will be able to immediately seek employment in allied health fields or pursue degrees in nursing or medicine as juniors in college. In addition to the expansion of a high school diploma into a college associates degree, the early college high school projects create an array of additional benefits for the involved institutions and the community in general, as follows:
One of my most memorable experiences with providing public benefit comes from a transaction that required some expansion of traditional risk parameters and innovative structuring to achieve success. My company was asked to provide financing for a small package of rent-controlled employee housing units in Aspen, CO. The local housing authority had responsibility for facilitating the development of affordable housing for the large body of lower-income labor required to support the skiing and hospitality industry in the Aspen area. The desire to do a lower-cost, tax-exempt financing was driven by a compelling need to keep the property rents more affordable for lower income tenants. At that time, the city and county had a very limited supply of rent-controlled housing. A majority of lower income workers had to commute from as far as 40 miles, down one of the most dangerous mountain highways in the country.
Of course, the transaction sounded fun and somewhat exotic because of the locale. However, the hurdles presented had precluded the housing authority from completing a successful tax-exempt financing for any of its properties to date. The primary roadblock stemmed from the fact that the housing authority was unwilling to allow its property to be mortgaged in a way that would allow a lender to resell it as non-rent controlled property at open market prices. Rent-controlled property was limited and hard to acquire. The authority did not want to jeopardize losing what it already had. Unfortunately, the resulting limitations on repossession and disposal of the property created an unsecured or under-collateralized transaction that was unacceptable to previous lenders.
For us, the compelling reason to proceed with the financing was also the source of great satisfaction upon completion. There were more than 1,000 applicants entered in the lottery to receive the right to rent one of the 26 units we were financing. By allowing for a much longer than standard grace period, the housing authority was convinced to allow repossession and resale at open market rates in the event of default. The large number of applicants virtually ensured full occupancy while dramatizing the need for and value of creating this type of housing.
The result of this effort was that 26 members of the lower income workforce (along with their families) had a decent place to live within walking distance or a short bus ride from their workplace. We had helped the waiters, waitresses, lift operators, bus drivers and retail workers who were keeping the community a thriving, attractive place to visit.
The ability to improve a community and help those with a real need at the same time was a very rewarding experience on its own. However, our sense of “doing good” was multiplied many times over by what happened next. Our work on the Aspen project generated the realization that there was an overwhelming shortage of employee housing in almost all of the Colorado ski resort towns. Consequently, we were able to use the structure we had devised to finance housing projects that supplied housing for more than 1,000 lower-income employees in five different communities. Those projects are a constant reminder that our work is still helping to provide affordable housing for lots of families in need.
Across the municipal lending and leasing industry there are probably hundreds of stories similar to those above. As these stories demonstrate, the municipal finance business can present opportunities to benefit the public in unique and socially rewarding ways. Moreover, most industry participants I have talked to will tell you that these special opportunities appear on a fairly consistent basis along with the daily routine of financing everything from office copiers to police cars.
Ultimately, personal satisfaction and socially rewarding experience are not sufficient justification to be in the business. Fortunately, municipal transactions with an exalted sense of public benefit can also have substantial economic benefit. Consider the following:
While federal government financing is soft due to the recent government shutdown and a general fear and confusion about future federal funding, the recent AGLF conference revealed that municipal finance is on the rise again. Many municipal projects and equipment acquisitions were delayed as a result of the recession in 2009 and 2010. The slow rebound in local tax revenues has resulted in a continuing backlog in the replacement of essential municipal equipment. Consequently, as the recovery continues most conference participants I spoke with were projecting increases in their 2014 municipal business. As municipal financing volume continues to increase, so too will opportunities to create special public benefit.
When properly funded and managed, a municipal finance portfolio can represent a profitable business with the cleanest and most attractive performance characteristics available in the world of finance. By participating in and highlighting certain transactions that provide a unique or elevated perception of public benefit, lenders and lessors can create invaluable goodwill in the marketplace while also enjoying the very special rewards that come from having a positive effect on the lives of others.
Bob Neptune serves The Alta Group both as a leader in public finance and as an advisor to financial services firms involved in governmental leasing programs. He was president of De Lage Landen Public Finance from 2005-2008 and president of ORIX Public Finance from 2001-2005.
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