Future County Projects Could Be In Jeopardy Through Use Of Zero Coupon Bonds Dade Commissioner Gimenez
Written by Risa Polansky on November 20, 2008
By Risa Polansky
Committing hundreds of millions of dollars in Miami-Dade County’s convention development tax revenue to pay off completed projects years down the road could jeopardize future county endeavors, Commissioner Carlos Gimenez says.
At a Budget and Finance Committee last week, he lamented the county’s practice of deferring principal payments on some bonds — and also raised questions about the zero coupon bonds that set the county up to pay hundreds of millions in outstanding principal beginning in 2026.
Convention development tax revenues, which the county collects on hotel-room rentals, are set to pay off the bonds.
In late 1997, the county issued three series of zero coupon bonds, which, like US Treasury and savings bonds, are bought at discounts and redeemed at their full value later.
The first, which reaches final maturity in October of 2026, had an original principal amount of about $86.6 million. The amount outstanding as of late September: $147.9 million.
The second series of $170 million reaches final maturity in 2036 and as of late September had $208.6 million outstanding.
The third series is the only one issued whose outstanding amount is less than its original principal amount, with $31.9 million outstanding on the original nearly $42 million principal. The bonds mature in 2038.
The county issued two more series in 2005, one with a 2035 maturity date and one that matures in 2040. Both have outstanding amounts larger than the original principal.
Commissioners reviewed the numbers in voting last week to allow finance staffers to issue down the road an up-to $350 million series of general obligation bonds.
They approved the measure but aired concerns about the county’s outstanding zero coupon bonds.
"This is pretty significant growth in the debt," Mr. Gimenez said at the meeting.
He requested that staffers provide a report on the zero coupons, including an amortization schedule.
Commissioner José "Pepe" Diaz noted that some of the outstanding principal amounts nearly double by the time the bonds reach maturity.
He chimed in with Mr. Gimenez in asking for more details.
"That’s out of control," he said. "I really want to see that information."
At the meeting, Finance Director Rachel Baum said the bonds are often used by parents to fund a child’s college education.
"They will invest a lump sum, let’s say maybe $1,000, and it grows to $5,000 in 18 years, or whatever the time period is," she said.
In an interview after the committee meeting last week, Ms. Baum said the zero coupon bond structure does not pose a problem for the county.
"There’s nothing wrong with doing it that way," she said. "It’s a funding mechanism."
She said also that "it’s not like we’re not paying anything… we’re paying each year, we’re just not paying totally."
The county has issued over the years $295 million worth of the bonds to fund the $470 million-plus performing arts center in downtown Miami, she said.
About $42 million worth of the zero coupon bonds were used to buy the land for the American Airlines Arena downtown.
"Usually you do those zero coupon type bonds when your revenue stream that you’re going to use to pay the bonds is growing and you don’t have a sufficient revenue stream in the early years to pay current interest," Ms. Baum said. "So you’re really able to issue more bonds with the assumption that your revenue stream is going to be sufficient to cover the payment."
In the county’s case, that revenue stream is its convention development tax collections.
"When we did those bonds in ’97, we knew that our convention development tax revenues were growing at about 7% a year, and some years our revenue stream grew as much as 10%, 12% a year," she said. "So, on the average it grew at a 7% a year basis, so we anticipated that the revenue stream would grow, and therefore we were able to structure the bonds to be paid off when the revenue stream was going to be higher."
Miami-based independent portfolio manager Jane Zucker said there’s little risk in issuing a zero coupon bond when the money’s there to pay it later.
"With the zero coupons, the problem is that when it matures, you’ve got to hand over the big chunk," she said. But "there is really no surprise, because if you sell a zero coupon bond, you know exactly how much you’re going to have to pay and when you’re going to have to pay it."
The county most likely planned carefully in issuing the bonds, she said.
"Government is run in a very conservative manner, so when they do offer the bonds, they have a plan, they have a backlog, they have contingency funds… there’s all kinds of safeguards."
But convention tax collections are never a sure thing, Mr. Gimenez said in an interview.
"Here’s the problem: the CDT and TDT [tourist development tax] are very sensitive to economic changes."
The fewer hotel rooms rented, the less money the county sees, he said.
But Ms. Baum said the county has "taken that into consideration that some years it [tax revenue] won’t grow as much."
Officials used a projected 4% growth rate to structure the bonds, and because tax collections have grown far more than that, "there’s enough wiggle room" to buffer changes in the economy.
"It’s structured to take advantage of the growth in the revenue stream, so we’re anticipating that the revenue stream, convention development taxes, is going to continue to grow," Ms. Baum said.
The Greater Miami Convention & Visitors Bureau reports that, through September, the county has collected a record $36.6 million in convention development tax revenue, up 1.8% from the $36 million during the same nine months last year.
Still, Mr. Gimenez said he fears that committing the tax revenue to pay off completed projects decades from now means the county could come up short in paying for needed projects at that time.
"We should be paying for these projects with the ability we have to pay today or within the near future," he said. "We can’t exhaust that capacity in today’s capacity — we’ve got to leave some for the future."
Mr. Gimenez promised that projects set to be funded with zero coupons will not get his blessing in the future — including a planned Marlins ballpark, should officials choose to finance it that way.
"Because [if I approve it], basically I’m burdening the future… really hampering the ability to do projects in the future," he said.
Ms. Baum said officials keep close tabs on what the county is able to finance.
"We would not issue additional bonds if we did not have additional capacity," she said. "In our projections, we have enough capacity."