Risks of Local Long-Term Bonding : Official Fears Possibility of a ‘Default Sooner or Later’
For many real estate projects in California, the ‘80s have brought an uneasy fusing of the flexible concepts of planning and the rigid financial requirements of tax-exempt bonding--a situation that is teeming with potential risks for developers, local jurisdictions and their financial advisers.
At least that was the conclusion of the researchers, public officials and financiers who spoke at the fourth annual Donald G. Hagman Commemorative Program at UCLA.
“This is the age of do-it-yourself spending at the local level,” said Dean Misczynski, principal consultant for the state Senate Office of Research and one of the organizers of the conference. With the disappearance of state and federal grants, local governments must use long-term bonding to help developers build the roads, sewers, schools and other “infrastructure” that new real estate developments require. These cities and counties, however, are just beginning to acquire the expertise they need to perform these tasks well.
“I’m persuaded that there’s going to be a problem--there’s going to be a default sooner or later,” said Misczynski.
The conference, co-sponsored by the UCLA Extension Public Policy Program, the Program on Social Ecology at UC Irvine and the Lincoln Institute of Land Policy, honors the memory of Donald G. Hagman, a UCLA law professor who died in 1982. Hagman was nationally recognized as an innovative thinker on issues relating to land-use law and urban development.
City-County Responsibility
Misczynski, who co-authored one of Hagman’s best-known books, “Windfalls for Wipeouts” (American Society of Planning Officials 1978), said the reason for the growing relationship between local land-use planning and long-term financing techniques is the phenomenon he called “No More Fairy God Government.” In approving new real estate projects today, cities and counties must also take responsibility for setting up the financial mechanisms to construct the infrastructure. The financing tools include old-style assessment districts, which have been around for about 75 years, as well as newer assessment districts available under the “Mello-Roos” bill, passed by the state legislature in 1982, and development fees and development agreements.
The use of these techniques is increasing rapidly. In 1985, special-assessment financing in California exceeded $700 million. According to Richard Cowart, a professor of urban and regional planning at UC Berkeley, more than 150 jurisdictions have entered into more than 500 development agreements with developers since the technique was created in 1979. By contrast, few cities and counties understood development agreements as recently as two years ago.
“There’s been a dramatic shift in the last 10 to 15 years, from small projects to master-plan communities,” said Joseph Evans, president of Empire Economics. “Generally, infrastructure costs are so high that the developers are going to be coming to (city officials) for assistance.”
Among other things, the sheer size of these projects and the expense of their infrastructure will force cities to turn to bonding because “pay-as-you-go” fees will not raise enough money.
Two Very Different Worlds
The result, said Misczynski, is the merging of two very different worlds--that of planners, who are reactive and must respond to changing conditions, and that of bond underwriters and lawyers, “who must structure a rigid world that will last 20 to 25 years.”
According to Misczynski and other panelists, this means that local jurisdictions could be liable for defaulted bonds if the developments they approve are unsuccessful--something with which local planners have never before had to concern themselves.
In this “brave new world” for local governments, as Misczynski called it, financial experts advised cities and counties to become much more aggressive in assessing the market strength of projects they might assist with bonds.
“The first thing a city should do is to take charge,” said Norman C. McPhail, vice president of Miller & Schroeder Municipal Inc. “If a city is going to put something into a project, there are city interests that have to be served.”
“I would suggest very strongly that you not just rely on the developer to take care of you,” Walter Hahn, management services manager of Kenneth Leventhal & Co., told the local officials in the audience. Independent studies are needed to “satisfy yourself that, over the long run, the project is feasible economically.”
Cities Could Be Liable
Bond lawyers also said that if the bonds default because the project is not successful, cities could be liable under securities law, as New York City was in the 1970s and the Washington Public Power Supply System was in the early ‘80s when their bonds defaulted.
Misczynski noted that this aggressive approach will lead to the public release of a great deal of financial information on particular development projects, perhaps fueling community demands for more mitigation measures.
As one panelist put it, the problem is the conflicting requirements of the different players--not just developers and cities, but even officials in different departments of local government.
“Planners want to create beauty, developers want to make money and finance managers want to keep the city out of debt,” said Kenneth Topping, the new planning director for the City of Los Angeles. “The problem is how to enter into creative partnerships that at the same time don’t undermine the ability to make public decisions in a public way.”
