Public Finance Update - December 2008

We depend on public infrastructure to deliver our water, remove our waste, light our homes, support our vehicles, and generally keep our lives functioning. Given that the bulk of our public infrastructure is deficient or obsolete and that municipal coffers are running dry during this current economic downturn, it is vital that municipal issuers find innovative funding sources for infrastructure repair and replacement. To that end, issuers are increasingly partnering with private developers in so-called "public-private partnerships" to share both the costs and the benefits of infrastructure development. For example, Goodwin Procter attorneys recently helped the City of Los Angeles partner with developers to subsidize the L.A. Live! development in downtown Los Angeles, a multi-billion dollar entertainment and lifestyle development. Los Angeles used its charter city authority to allocate millions of dollars in future revenues from hotel occupancy taxes to the project. Goodwin has helped many other cities, including Buena Park, Burbank, Irvine, Long Beach, and San Francisco, to successfully partner with developers to subsidize the construction of various infrastructure projects by pledging anticipated increases in tax increment, sales taxes, and other revenues to secure bonds or to reimburse development costs.

The average yield on municipal bonds has risen nationwide during the last 12 months from approximately 4.30 % to 5.75% for triple-A paper, and from approximately 4.45% to 6.40% for A-rated debt. Moreover, in this economy, nervous investors are hesitant to commit their capital, even to traditionally conservative investments like municipal bonds.

Since Wall Street has now moved to Pennsylvania Avenue, on November 21, 2008, California Treasurer Bill Lockyer and 19 California municipalities sent a letter to House Speaker Nancy Pelosi (D-CA), House Financial Services Committee Chairman Barney Frank (D-MA), and Senators Dianne Feinstein (D-CA) and Barbara Boxer (D-CA) bemoaning California’s current credit crisis and requesting liquidity support for their variable rate debt. Recent ratings downgrades of the major municipal bond insurance companies and the concurrent credit freeze from banks providing bond credit enhancement and liquidity support have wreaked havoc on California’s short-term bond market. The letter does not outline a specific program, but suggests that it would help if the federal government were to purchase short-term municipal bonds or lend money to banks to make such purchases.

In response to California’s current budget crisis, the state’s Pooled Money Investment Board (PMIB) recently cut $3.8 billion in funding for approximately 2,000 infrastructure projects statewide, including projects for highways, prisons, and schools. PMIB’s chair, California Treasurer Bill Lockyer, noted that PMIB’s action is "extremely regrettable," but that the board "had no other option to keep crucial public services operating as long as possible." PMIB’s action will necessarily prompt local issuers and developers to explore alternative methods of financing vital infrastructure going forward. As the economy recovers and private development resumes, the use of land-secured financing strategies is expected to increase dramatically, including the Mello-Roos community facilities district structure that has been used so effectively in California.