Financiers, economists and lawmakers fret over the so-called underground economy and how it distorts and harms markets, but what the rest of us should be fretting about is what might be called the above-your-head or over-the-top economy, where huge fiscal decisions are made mostly out of sight of most citizens. Case in point: Wisconsin's Public Finance Authority (PFA), www.pfauthority.org an obscure creation of the state government that, while a statutory creature, runs basically outside that government and makes billion-dollar decisions affecting economies all over the US.
The authority was created in 2010 with the support of the National Association of Counties, the National League of Cities, the Wisconsin Counties Association and the League of Wisconsin Municipalities. Since then, the PFA has arranged nearly $4 billion worth of low-cost, tax-exempt and other financing, mostly involving revenue bonds, to 150 private and public projects in 40 states.
According to a Wisconsin State Journal newspaper report in 2013, early projects included Planned Parenthood of New York, a California-based chain of Christian radio stations, and a Mount Horeb (WI) grocer. PFA early on also issued bonds for the Wisconsin-based Adams-Columbia Electric and Central Wisconsin Electric Cooperative’s Midwestern Disaster Area bond and recovery zone facility. Then there was $41 million in tax-exempt revenue bonds issued for a convention center in Jackson, Mississippi. A mixed bag, in other words.
But more and more of the Wisconsin PFA’s activity is out of state and off the main sequence. Many of the authority's initial projects outside Wisconsin involved construction of charter schools, along with medical and housing facilities.
A Wall Street Journal story in 2011 reported how the PFA arranged a municipal bond issue of up to $125 million to fund a North Carolina retirement community. More recently PFA issued $325 million of bonds for the University of Kansas, a public entity, to be sure, but a deal which might come as a surprise to the budget-starved University of Wisconsin System back on the PFA’s home turf.
And now, the developer of American Dream Meadowlands, a controversial, 3-million-square-foot mega-mall and entertainment venue in East Rutherford, New Jersey, is hoping the Wisconsin authority will arrange a billion dollar bond issue so it can finish its cash-strapped, long-delayed development, which some New Jersey news media have described as "a case of corporate welfare" and "too big to fail." en.wikipedia.org/...
The mega-mall developers had sought bonding from the City of East Rutherford, which wants the new tax base and economic development but decided it couldn't risk issuing public bonds. The city’s mayor now says the Wisconsin Public Finance Authority may come to the rescue.
The Madison-based Wisconsin State Journal report three years ago was, as far as I can tell, the last time any mainstream media outlet in Wisconsin wrote about this obscure (within Wisconsin, at least) agency. But PFA remains under almost continuous fire in some other states. From that Wall Street Journal piece: www.wsj.com/...
Critics claim the Wisconsin organization's willingness to back deals spurned by regulators elsewhere means investors are vulnerable to risky bonds that otherwise might never get sold.
Some state officials say Public Finance Authority is meddling in their business with no regard for longstanding public policy, risk tolerance and procedures used by states to approve or reject municipal-bond deals.
"It doesn't seem to be good public policy to allow an issuer in one state to override decisions made by another state," says Tom Dresslar, a spokesman for California State Treasurer Bill Lockyer. "That seems to be a cockeyed way for government to work." [Ironically, California is home to the other major, state-created public finance authority operating nationwide.]
Lawmakers in Illinois and Washington have passed legislation aimed at discouraging Public Finance Authority from issuing bonds for projects in their states, saying existing authorities do the job just fine.
An Illinois Finance Authority (IFA) official told the Bond Buyer trade magazine: "Under state statutes, the IFA serves an essential public function, and there is a direct line of accountability to all branches of Illinois government. This model [the Wisconsin PFA] cuts the cord of essential accountability and transparency."
PFA has fought back against its critics, issuing FAQ sheets about its many benefits and the rationale for its unusual nationwide focus. “The experience and capabilities we provide as a national conduit bond issuer enables PFA to bring efficiencies to the bond issuance process that may result in savings borrowers might not otherwise realize,” said Mike LaPierre, PFA program manager, in a news release last year.
On the other hand, purely in-state financing authorities like IFA complain that while the Wisconsin PFA offers project first rights to Wisconsin state government's purely in-state economic development agencies, it doesn't provide similar courtesies in other states.
Now, before you get too outraged (although at least some outrage might still be in order), be advised that PFA does not use public subsidies or tax dollars to cover the cost of its operations. Nor are Wisconsin taxpayers on the hook for funding any PFA-backed developments, inside or outside Wisconsin, or assuming any financial risk. From the State Journal:
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.
Revenue bonds are not backed by the “full faith and credit” of governments, so the risk is, at least on paper, entirely assumed by investors, most if not all of them private. Then again, there's an obvious opportunity cost in issuing partially tax-free bonds -- they effectively reduce tax revenue, which could be used to fund public programs and projects.
While the historical purpose of such bonding is to fund important public infrastructure, more recent public bonding authorities seem to have evolved beyond that, supporting private ventures on the apparent premise that tax collections and job creation from such private development will benefit the tax and economic bases.
But the people deciding which projects are worthy of investment are largely non-public. PFA's board does include public entities. From its own description (see more at link to PFA website below): "PFA's governing board is comprised of representatives appointed by the Sponsors and approved by the Wisconsin founding members consisting of the City of Lancaster and the counties of Adams, Buffalo, Waupaca, and Bayfield." These are all relatively small communities and counties.
The "Sponsors" include the previously mentioned National Association of Counties, the National League of Cities, the Wisconsin Counties Association and the League of Wisconsin Municipalities. These arguably are reputable, thoughtful organizations, which in their own words sought through the creation of the Wisconsin PFA to better empower struggling local and regional units of government with a better economic development financing model.
But while a case might be made for the need to cross state boundaries, the Wisconsin PFA has served as a lightning rod for people concerned about shadow government and private financial dealings that are likewise less than wholly transparent.
[By the way, progressives shouldn’t rush to blame the PFA's creation upon Gov. Scott Walker and his merry band of GOP corporate giver-awayers in the Wisconsin legislature. It might seem like the very kind of outfit they'd create, but in fact the PFA legislation was enacted in early 2010 by a Democratic legislature and signed into law by Gov. Jim Doyle, a Democrat.]
[Now, one can't be sure that tea-minded Gov. Walker wouldn't object to an organization that funds charter schools and Christian radio stations; nor has Team Walker seemed too upset about deferring resources to other states or the federal government while getting little or nothing back. On the other, other hand, Wisconsin Republicans up to and including Walker frequently have usurped local government control; so, watch to see if they want to make a fuss about all this and perhaps even re-jigger the law so that they become the bosses.]
Apologists might argue that billions of dollars in lending activity by this Wisconsin-based institution creates some positive economic benefit in the Badger state. Well, perhaps. PFA projects within Wisconsin clearly have been somewhat beneficial, but in terms of both the authority's internal and external operations, most of the benefit has been outside the state. In that sense the organization might be regarded as a sort of beard for national economic-development interests, many of them private.
PFA collects fees measured in the thousands of dollars for issuing bonds, and then collects annual maintenance charges for bond handling. These bond issues create work for the PFA's Wisconsin-based general counsel and outside firms that help prepare some bond deals.
On the other hand, the PFA as of 2011 had only one employee located in Wisconsin. In total, the authority that year had 30 other employees -- all of them outside Wisconsin, and half at HB Capital Resources, a Walnut Creek (CA) municipal-bond firm that pretty much seems to have been running the show. And as of earlier this year, according to Bloomberg news, the authority’s staff had declined to zero: www.bloomberg.com/...
One of the most prolific issuers in the $3.7 trillion municipal market is a Wisconsin agency with no employees, coveted tax-exempt bond status and a nationwide client list.
The Public Finance Authority last year issued bonds for more than 30 charter schools, senior living facilities, universities and real estate developers in 15 states. None were from Wisconsin... .
The deal highlights an obscure corner of the state and local-government debt market where pass-through agencies rent out their ability to sell tax-exempt bonds to out-of-state companies and non-profits in exchange for a fee. The practice has drawn criticism from some public officials, who say it can allow debt issuers to skirt their oversight by financing projects through authorities beyond their jurisdiction.
The Wisconsin PFA and the market it represents are not on the public’s radar. But the organization is very much showing up on sensors at the some of the nation’s most active private and public development institutions.
Even if tax dollars are only indirectly affected by all this financial activity, the public arguably should be more attentive, and better represented formally. The bigger issue may be this: An organization created to empower local governments is now running a nationwide operation that sometimes trumps those governments. Department of Irony, you have waiting messages.
[A tip o' the hat to blogger Atrios and my occasional cohort KD for turning up the PFA's existence]