It sounds preposterous, and the headline of a recent article here at Forbes by Marilyn Cohen is certainly eye-catching: “The Lunacy Of Using City Streets To Collateralize New Municipal Bond Deals.” And these aren’t just any municipal bond deals — two cities in California are issuing bonds with their own city streets as collateral to pay down their unfunded pension liabilities.
In West Covina, the city council voted to do so on July 7, as reported at the San Gabriel Valley Tribune. The city, a suburb of Los Angeles with a population of 100,000, a median household income of $71,200, and nearly $200 million in pension liabilities, is using the proceeds of $205 million in debt to pay off its own debt to CalPERS.
Likewise, according to the East Bay Times, the city of Torrance, also in suburban Los Angeles, population 150,000, median household income $80,900, pension debt $500 million, will issue $350 million in bonds. (See the formal report of the recommendation and the minutes of the July 28 city council meeting.)
Now, it turns out, they’re not turning their streets into toll roads, or giving bond-buyers the ability to “foreclose” or take control either now or in the future.
They’re using a bond-issuing mechanism called “lease revenue bonds.” We’re all used to cities paying for public works, stadiums, and the like by issuing bonds which are paid off by a dedicated revenue source — sewer bills, hotel taxes, etc. But lease revenue bonds are different. Here’s the layperson’s description at Charles Schwab:
“Lease revenue bonds are a unique structure in the muni market. Instead of issuing long-term debt, like general obligation bonds do, to finance improvements on a public facility, the municipality may enter into an arrangement that uses lease revenue bonds. Often a trust, not the municipality, issues bonds and generates revenues to pay the bonds back by leasing the facility to the municipality. The municipality will generally appropriate money during each budget session to meet the lease payment.