In just over three years, a little-known government entity created by the Wisconsin Legislature has arranged more than $1.3 billion in mostly tax-free loans for businesses in 33 states.
The Public Finance Authority has delivered reduced-tax financing for a Baptist seminary in North Carolina, Planned Parenthood’s national headquarters in New York, a California-based chain of Christian radio stations and a grocer in Mount Horeb.
Closer to home, it supplied
$55.9 million in tax-subsidized bonds for the controversial Edgewater hotel in 2012 after the developer clashed with Madison officials and a subsidy deal collapsed.
The type of debt the authority issues has drawn criticism. Meanwhile, financial statements for 2011 and 2012 show the agency itself lost money.
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Still, backers say the PFA spurs vital business expansion without risk to taxpayers.
Unlike conventional government bonds that guarantee lenders will be repaid, the “conduit bonds” offered by the PFA and other government agencies simply bring together investors and developers and then grant tax-exempt status to the interest earned by the investors.
The PFA stands out as one of a few agencies in the country doing deals unrelated to their home states and because it is run without a public employee as director, said James Hamill, program manager for HB Capital Resources in Walnut Creek, Calif.
Almost all the work is done by Hamill’s company, despite the authority’s address on Madison’s Mifflin Street in the offices of the Wisconsin Counties Association, a private organization of county officials that helped found the PFA.
Fewer than a quarter of the authority’s 46 projects since 2010 have involved investment in Wisconsin. Nationally, most were for construction of charter schools, along with medical and housing facilities, Hamill said.
In or out of the state, the PFA issues bonds that other government agencies won’t, Hamill said.
“Sometimes the municipalities don’t have the staff, time or expertise,” Hamill said.
But the PFA has gotten business for other reasons, too.
In 2011, the developer of a 5,000-head dairy farm in Rock County turned to the authority for $15.6 million after residents forced a referendum on town of Bradford plans to issue bonds.
And last year the authority arranged financing for a $117 million retirement community in North Carolina after state officials there said the deal was too risky.
The Wall Street Journal and bond industry publications have reported concerns that debt issued by conduit bond entities has a high default rate.
Hamill said the PFA has had no defaults. HB Capital also runs California Statewide Communities Development Authority, which Hamill said has issued bonds for about 1,300 projects worth $48 billion since 1988 with only three defaults.
Every PFA project requires approval from state or local governments where the development will occur, Hamill said. All deals in Wisconsin are exempt only from federal taxes, he said.
‘Not a free-for-all’
Some states, fearing competition, have taken steps to lock the PFA out, Hamill said.
Other adversity has faced the California bond authority run by HB Capital. Some officials there say agencies run by private business have slipped loose of accountability and transparency, opening the door to unseen conflicts of interest and runaway payrolls.
Hamill said the concerns are unfounded. In Wisconsin, the PFA files reports with several state offices, Hamill said. A board of county and municipal officials appointed by the counties association and three other private associations of government officials gives final approval to the often-complex deals.
“It’s not a free-for-all,” he said.
The PFA board has never rejected a deal proposed by its management company, but HB Capital has turned away about $1 billion in proposals because the potential borrowers and lenders hadn’t thoroughly analyzed risk, Hamill said.
In 2004, HB Capital’s California authority asked legislators for permission to operate nationally, but it never happened. Five years later in Wisconsin, Hamill consulted with the National Association of Counties, the state counties association and two organizations for municipal officials as they helped write the law enabling formation of the PFA.
In 2010, the authority was formed and Hamill’s company was awarded a seven-year contract to run it. The company collects all but a small portion of the PFA’s revenue, which comes from fees charged to borrowers.
Hamill said the PFA’s deficit going into 2013 — $564,000 accumulated over three years — doesn’t mean HB Capital is overpaid. When the authority reaches its stride, revenues will eliminate the red ink, which amounts to startup costs, Hamill said.
The PFA reported roughly
$1.3 million in 2012 revenue. The money was used for contracted services as well as to support salaries of eight to 10 HB Capital employees and several counties association workers who spend at least some time on PFA business, Hamill said. He wouldn’t provide a more detailed breakdown or disclose salaries.
The 2013 PFA budget predicted the deficit would grow this year. Business has slowed because of competition from low-interest conventional loans, Hamill said.
A 2012 California audit of two state bond agencies run by private companies — including the one HB Capital operates — led the agencies to agree to hire publicly accountable executive directors and open competitive bidding on the management contracts every three years to ensure reasonable prices.
“We’re hopeful the agreement satisfactorily resolves the dispute,” said Tom Dresslar, spokesman for state Treasurer Bill Lockyer, a critic of handing over government bonding authority to private firms.
Industry lobbies for more
The PFA was created after the National Association of Counties asked the Wisconsin Counties Association to help create a new agency to issue tax-exempt bonds nationally, said state association chief of staff Mike Blaska.
Bonds for private investment have grown in popularity. Because investors pay no taxes on interest they earn, they are able to set lower interest rates for borrowers. And governments use bonds to compete with neighbors for investment that creates jobs and tax base, said Andrew Reschovsky, a professor of public affairs and applied economics at the UW-Madison La Follette School of Public Affairs.
It looks like everyone wins, but whenever someone is exempted from a tax, it means other taxpayers pick up the slack, he said.
Critics say federal law makes too many types of private development eligible for tax-exempt bonds, said Susannah Camic Tahk, a UW-Madison law professor who specializes in tax policy. The push to keep eligibility broad has come from industry groups, including the specialized attorneys who earn fees arranging bond sales, Tahk said.
“There is an entire industry of municipal bond attorneys,” Tahk said. “They become an interest group themselves.”
Gambling establishments, liquor stores, health clubs and airplane construction are among the relatively few development types that are ineligible under IRS code, she said.