June 17, 2015

A Florida City Makes Money Financing Other Cities’ Economic Development

Gulf Breeze, Florida could be writing a new chapter in local economic development policy, which often pits cities and states against each other to attract or keep businesses (including professional sports teams) and the taxes and jobs they generate.  Gulf Breeze’s secret: Capital Trust Agency, “a special class of bond issuer referred to as a conduit agency” that has issued more than $1.5 billion in tax-exempt bonds. 

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Now, Capital Trust isn’t the first municipal agency to issue these types of bonds, but it’s among the few that has done so on behalf of other cities and states. The tax-exempt bonds it issued have financed apartment complexes and assisted-living facilities throughout Florida, private jet hangars in Texas and Mississippi, and hotels at casinos on Seminole tribal land in Hollywood and Tampa, according to a recent Bloomberg Businessweek article. Capital Trust didn’t issue these bonds for free. In fact, it earned Gulf Breeze $11 million in fees since 2002, “which has paid for recreation centers and padded the city’s rainy day fund.”

Most states have quasi-public agencies like Capital Trust authorized to issue bonds. “Florida is one of only seven that allow some conduits to issue bonds for out of state projects,” the article states. “Taxpayers benefit from the fees collected by the conduits and aren’t on the hook to repay the debt.”
But every silver lining appears to have a dark cloud. Conduit bonds, which make up 30% of the municipal bond market, “account for almost 60% of the defaults,” according to the article, citing Municipal Market Analytics partner Matt Fabian.  While conduit agencies like Capital Trust help local governments attract private investments, “you have local debt being issued without adequate oversight,” Christopher Taylor, former executive director of the Municipal Securities Rulemaking Board, told Bloomberg Businessweek.