This is the second lecture in my series “The Law of Green Fiscal Mutualism,” a series of video recordings I made for my education law class last year (the readings that went along with it are below). The first one is here. None of the lectures is longer than 30 minutes. It’s just me talking, no powerpoint or anything. I sort of intend these to be listened to like podcasts.

Here’s the link to the second lecture, which is about school bond financing in New York state. Maybe at some point I’ll write about it, but I’ve been so effing busy I haven’t gotten around to drafting.

READINGS

Bond Basics for School Districts in New York State, Chapters 1-3, 11-13, PDF.  

Weissman, G. H. (2009). The Reality v. Legality of Conduit Financing by the State—Public Authorities, the Chosen Financiers. Government Law and Policy Journal—New York State Bar Association, 11, 48-58. PDF

Aron, J. (1974). New york public authorities: Changing form and function. Nat'l Civic Rev., 63, 295. PDF

Environmental Finance. “Social Bond of the Year - US Muni Bond: The City of New York.” 2023. https://www.environmental-finance.com/content/awards/environmental-finances-bond-awards-2023/winners/social-bond-of-the-Year-us-muni-bond-the-city-of-new-york.html

NOTES

Overall subquestion of interest: is there anything in the laws around school bonds in New York State that would prevent a school district from selling to a pension rather than to an investment bank?

My sense at this moment is that no, there's no regulation preventing this. New York State and federal bond laws regulate a ton of things, making it very complicated to figure out what might not be allowed. But the states, in the form of the local finance law, education law, and general municipal law, have to do with whether the district can get a loan for the purposes it's saying it wants to, to protect "the comfort of the purchasers of such debt that it is a valid and binding obligation of the school district." (basics, 2) It's also very concerned with when the state is responsible and when the locality is responsible, and thus what actually counts as a debt (rather than a revenue stream that pays back a warrant).

There's a dialectic of restraint and circumvention here that I want to pay attention to in the laws. The state and federal laws constrain districts, but laws surrounding authorities circumvent many of these restrictions. I think it's interesting to note that school districts don't really get access to that circumvention in the provision of education--they can in some instances, yes--but largely they have to do GO bonds. I think schools in NY are more constrained than other forms of provision since authorities aren't in the game as much. Or at least, schools haven't been able to take advantage of the creativity inherent in authority creation, perhaps that's the better claim. And because school districts have been so restrained, haven't really gotten to take advantage of the circumventions, I think there's a good case that pensions should purchase their loans. This shit is unfair!

STATE CHOKER

*The big important state law sections are Article VIII, implemented by the local finance law, where sec. 1 covers districts not lending any money to anyone else, sec. 2 is about "pledge of faith and credit," --and it's wild that there hasn't been a default in more than 100 years on school district GO debt, but it's still taken "very seriously" (p.9)--and probable usefulness of projects and timing, there's also debt limits (sec 4), which is interesting, and sets out limits for specific localities of certain sizes, like NYC, and then sec. 10, determining the assessed valuation of a jurisdiction through a ratio determined by the State Office of Real Property Services (determining assessed vs. full value). Also: Art. VII, sec. 11 (voter approval, a big one), Art VII sec. 8 (lending credit to a public corporation), Art X sec 5, the state assuming debts.

*It's interesting that the local finance law has the statutory counterparts to the constitution: the law enacts those clauses, stipulating further stuff, like what school districts can borrow for, which does include pension contributions (8), and the fact that a district can't pay more than 9% interest on a bond, and setting out state intercept laws, which are a "comfort to investors and to the credit agencies in rating school district debt" (11). The creditors always get paid first, which is why it makes sense to make your creditor your pension! "Requiring first revenues to be applied by school districts for payment on indebtedness" (12).

CHEEKY AUTHORITIES

*Authorities were created, in their current form, to circumvent all these regulations. Basically to say: we don't want people to vote on taking out loans, and we want to take out as many loans as we want rather than be limited. The authorities weren't municipalities, nor were they states, and when they issued bonds they did it for stuff that had a revenue: tolls, tickets, bill payments, etc., not taxes. This is the "new style" of authority that Aron talks about, and the "conduit financing" Weissman details very well, where entities are passing facilities and stuff back and forth, doing back flips, taking out loans la di da--and as Leavitt pointed out, yeah, it actually did commit the state to appropriations, even though it technically didn't. Cheeky! Like the "pothole" bonds example, wow (Weissman, p. 52) So there was all this creativity letting all kinds of municipalities skirt debt limits and referenda...except school districts.

*Laws do differ between regular districts and the "five large city districts," and when it comes to NYC I happen to know that the city has an authority called the NYC Transitional Finance Authority, created in 1997 "for the purpose of permitting the city to obtain capital for infrastructure as it bumped up against the constitutional tax and debt limits." I also happen to know that the TFA issues bonds repaid by building aid revenue bonds, which are taxable bonds half of whose revenue comes from the state, specifically for school infrastructure. But the BARBs as they're called are rated lower than the future tax-secured bonds that the TFA also issues. This costs the city and state more, which I think also makes the case for the pension purchaser: it wouldn't matter as much if the pension were the buyer, wouldn't cost as much.

Aron quote about democracy, at the end of the authorities pieces

FEDERAL

*Now that's the state regulations, which are all about the faith and credit of the municipality, what the state's responsible for, and the dos and don'ts for school districts. The federal laws are more selective. Of course, the main law at the federal level that makes this whole thing tick is the tax exemption of interest on municipal bonds, codified in Article 16 of the constitution in 1913, and then the Revenue Act of that year. That means you can make interest money from investing in school bonds and the federal government won't tax you.

*But in 1986, there was an earthquake in how this exemption is regulated, and these are the federal laws around that, specifically whether a municipal bond could remain tax exempt and entice investors. Two big considerations here: whether the bond is an arbitrage bond (making money by investing loan revenues at one interest rate in investments at a higher interest rate, making some income) or if it's a private activity bond (for a purpose that isn't public). This put school districts in even more restraints for stuff they didn't even do! It's like a kid getting in trouble just because he's in the class with a troublemaker but didn't break any rules.

*The arbitrage rule says you have to spend the revenues basically within two years or else you have to pay the government a rebate on any money you make while holding those funds. Historically for school districts and other borrowers, those arbitrage funds paid the cost of issuance, which is a total bummer and I think is bullshit, frankly. Another reason to make the pension the purchaser: to save on those costs.

*I thought it was particularly illuminating that the 1986 law lowered the threshold of some private use on public bonds to 10% and now there's this whole game about whether we're within those limits (leading to the examples on p.94, with some musical fake names).

In any case, the laws around bond financing for school districts in NY, at the local, state, and federal levels, are all super restrictive, and the opportunities for circumvention aren't really extended to schools, who can't set up a fun authority based on self-liquidiation or conduit financing with private entities, so get stuck with the worst of all legal worlds--all of which makes the case that pensions should purchase these bonds with the back of green banks, where we're going next.