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Wisconsin’s risky bond scheme

Empower Wisconsin | Oct. 25, 2019

By M.D. Kittle 

MADISON — American Dream, New Jersey’s monument to retail excess, is slated to open today after 17 years of financing mishaps and construction delays.  And thanks in no small part to the Wisconsin legislature.

The first phase of the $5 billion behemoth mall in the shadow of Manhattan, includes a Nickelodeon theme park and NHL-regulation-size skating rink. Later this year, developers will open a Dreamworks indoor waterpark, billed as the largest in North America (sorry Wisconsin Dells), and an indoor snow park. 

The shopping complex on steroids might not be exactly what the legislative enablers of Wisconsin’s Public Finance Authority had in mind when they signed off on legislation effectively creating the PFA a decade ago. 

The middleman issuer of tax-exempt and taxable conduit bonds for public and private entities has long billed itself as a partner in financing public benefit projects. It has become synonymous with risky investments, as the Wall Street Journal  recently noted in a closer look at the PFA. 

With $10.4 billion in outstanding bonds in 2018, the PFA is one of the biggest issuers of high-risk bonds in its space. The vast majority of that activity, like the New Jersey super mall, has been done beyond the state in which the PFA is supposed to operate. Its activities have come under increased scrutiny.

In the wake of the Wall Street Journal piece, some lawmakers insist the Legislature take a closer look at its pet project. 

“The article raises serious questions about the integrity and practices of an organization created by the legislature,” a group of 17 lawmakers stated in a letter to the Joint Legislative Audit Committee earlier this month. The letter was obtained by MacIver News Service. 

But questions and investigations have plagued the PFA for years. 

The “bonding house of last resort” assisted in the financing of the American Dream project. 

“It is probably as risky as you can get on the risk spectrum,” Lisa Washburn, managing director at Municipal Marketing Analytics, told Bondbuyer.com. “In a different market this deal may have run into more challenges.”

The project’s developer, which also runs the Mall of America in Minneapolis, said using PFA as a conduit was the most efficient and cost effective strategy to promptly sell the bonds.

“It’s a very speculative transaction with a long history of problems getting done,” Washburn told the publication. “And it’s going into gigantic headwinds in the retail industry.”

High risk, it seems, is the PFA’s calling card. It has served as bond issuer for large-scale projects such as Planned Parenthood’s national headquarters in New York and a luxury hotel complex in Dallas that was under review by the Internal Revenue Service and the Securities and Exchange Commission. Another project in southern Nevada was funded by $22 million in government bonds from the PFA before it went belly up. 

A new report by the Legislative Reference Bureau asserts the state or the Wisconsin cities and counties that effectively co-signed the PFA’s existence would not be responsible for repayment of failed projects.  

“Overall, it is unlikely that the Wisconsin state government, its member municipalities and counties, or the PFA itself is liable if PFA projects no longer provide enough revenue to repay its bonds,” the report notes. 

Unlikely isn’t a guarantee, though. The Reference Bureau notes that while the state “appears to not be liable for the PFA’s debts, it is possible that a large default “could have repercussions for state and local governments’ ability to finance future projects with bonds.” 

Such was the case in Michigan, in the wake of Detroit’s bankruptcy in 2013. The financial implosion suppressed demand for bonds statewide, even though many affected governments weren’t at fault. 

Still, the Legislature has expanded the PFA’s authority on at least three separate occasions. 

In 2017, PFA lobbyists and Republican legislative leaders attempted to shove through a provision that would have given the PFA authority to take property through condemnation. 

That was a bridge way too far for some conservative lawmakers. Then-Gov. Scott Walker, a Republican, vetoed the provision out of the bill. 

Multiple Capitol sources said Republican leadership again planned to introduce last-minute legislation to benefit the Finance Authority in the recent budget session. Nothing ultimately made it to the floor.  

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