The Vision Tulsa sales tax has been in effect less than seven months and already the city of Tulsa has about $121 million in the bank waiting to be spent on economic development projects.
That’s nearly a quarter of the $511 million the city plans to spend on Vision Tulsa economic development projects over the next 15 years.
So what’s going on here?
The costly magic of municipal bond sales, that’s what.
On May 17, in a 10th-floor conference room, the city sold $115.3 million in revenue bonds, the interest and principal on which will be paid with Vision Tulsa sales tax collections.
City Finance Director Mike Kier, joined by two other city employees and John Weidman, a bond attorney, met in the conference room at 10 a.m. to watch the bids come in on big-screen television attached to the wall.
Surprisingly, four men waiting on a $115.3 million payday never looked so bored.
Or was it nervous?
Municipalities, including Tulsa, use bond sales to advance fund projects all the time. But the stakes are high: underestimate what interest rate the city will pay on the bonds, for example, and the entire funding package can be put in jeopardy.
So Kier and his crew sat down to wait. And wait. The bond sale would last 30 minutes, but most of the time the big television screen on the wall was blank. The first bid didn’t come in for 20 minutes, and just as quickly as it popped up, it disappeared.
Then came minute 29, and the screen lit up. Suddenly, the four bored men turned animated, calling out “City Group” and “J.P. Morgan” as offers from those financial services giants and six others flashed across the television monitor.
The bid that was ultimately the lowest, from Mesirow Financial, appeared on the screen at 10:29:58.
The interest rate, 2.640792 percent, was four-hundreths of 1 percent less than Bank of America’s bid, and nearly a half a percentage point lower than what the city had expected to pay.
Here’s why that matters: Tulsa voters approved the 15-year Vision Tulsa sales tax last year, but Tulsa leaders — and the organizations associated with the economic development projects the tax will fund — don’t necessarily believe it’s wise to wait until the city has collected all of the tax revenue needed to build a project before actually building it.
So Mayor G.T. Bynum and the City Council, through the Tulsa Public Facilities Authority, has chosen to advance fund projects by selling revenue bonds like the ones sold in May. The higher the interest rate on those bonds, the more interest the city will have to pay. And on a $115.3 million bond sale, that can add up.
Kier estimates the half a percentage point difference between the interest rate the city expected to pay and Mesirow’s offer will save the city $3 million to $4 million in interest costs over the 15-year life of the Vision Tulsa program.
“Until you’ve done a few of these it’s just like really nervous time,” Kier said after the final bid rolled in. “You’ve got like one bidder, nobody else seems like they’re interested, then they disappear on you and you are like, ‘Oh, my gosh.’”
But, on this day, Kier was pleased with how things turned out.
“I would rather start out with that breathing room than the other direction,” Kier said. “If I am going to be 45 basis points — almost half a percent — I would rather start there than a quarter percent higher. …We’re down to 2.64 (percent), and that is a great place to start.”
And that is all May’s revenue bond sale was — a start. The city expects to issue revenue bonds three more times in the next four years. In all, it will raise $372 million through bond sales.
Projects not funded through the sale of revenue bonds — known “pay-as-you-go” projects — will be funded directly from Vision Tulsa sales tax collections.
“We will do some projects strictly from the revenue that is collected from the tax, but most of them will be paying debt service,” Kier said.
The city begins fiscal year 2018 — which started July 1 — with approximately $121.5 million in the bank for Vision Tulsa economic development projects: $115.3 from the sale of revenue bonds, and $6.1 million in actual sales tax collections. That total is expected to reach $135 million by the end of the fiscal year.
So far, the city hasn’t spent almost any of the money — at least not to build anything. But you don’t sell $115.3 million in bonds without incurring some costs.
Take Weidman, the city’s bond attorney. He was paid well for his time and efforts. Efforts, he is quick to note, that began more than a year ago.
It was Weidman, with the law firm of Hilborne & Weidman, who issued the opinion on behalf of the city that the Double-A-minus bonds Mesirow purchased were exempt from federal income tax and issued in accordance with the laws and Constitution of the state of Oklahoma.
“We do all the legal offerings, the sale and delivery of the bonds and include our opinion on the back of the bonds,” Weidman said.
His fee: $157,800.
The second-largest single expenditure the city incurred in issuing the bonds was the $61,750 it paid to the rating agency Standard & Poor’s Financial Services LLC.
The city paid I-Deal Prospectus $1,500 to provide the online bidding service, and another $1,200 a year is being paid to UNB Bank to serve as the trustee bank. UNB, not the city, holds the bond revenue and distributes it as expenses are incurred.
In all, the city spent approximately $300,000 to raise the $115.3 million in bond revenue. That is nothing compared to the debt service the city will pay on the bonds themselves — about $27.6 million.
Kier estimates the city will pay $77 million in interest on the $372 million in bonds it plans to sell. But building now, even with borrowed funds, will be cheaper than building later, Kier said.
“The interest cost is still expected to be less than the cost of inflation if the projects were funded over the length of the 15-year tax period,” he said. “Inflation would add an estimated $90 million to the project costs.”
The city also has to think about why it is constructing the projects in the first place.
“If they are meant to provide economic development benefits, the longer you take to get the project in place, the longer it takes for you to see the benefit of the projects,” Kier said. “All things being equal, you’d rather have those projects sooner rather than later.”
The city is already preparing agreements with the organizations that will be receiving Vision Tulsa funds.
Paul Zachary, director of the city’s Engineering Services Department, said he expects that “Expo Square, Community Health Connection and Tulsa Community College are going to be in a race as to who turns dirt first,” with work likely to begin as early as the fall.
Kier, a soft-spoken man with a quick wit, seems as upbeat about the state of the Vision Tulsa program as a man like him will let on.
“We have been working a long time just on the general structuring of this little puppy,” he said. “Actually, for the last year in terms of what projects, when they think they need the money, how can we line that up, the revenue we are going to get, is it going to be pay-as-you-go?”
Now all that’s left for Kier is to hope and pray that the next 15 years of the program go as he’s projected – a wish he knows all too well is too much to ask.
“We are just starting and have years to go managing the program. We expect things to change and will adjust as necessary,” he said.