Carmel Mayor Jim Brainard is trying to streamline the city’s debt management with a new board he handpicked.
The six-term Republican has established the Local Public Improvement Bond Bank, which essentially serves as a conduit for issuing bonds to help the city secure lower interest rates. It’s a system used by several of Indiana’s larger cities, including Indianapolis.
But it’s not clear whether Brainard’s method in creating the bond bank, his choices for key positions, and his proposed combination of smaller bonds follow state guidelines and best practices.
“You gotta make sure you’re doing things right. When done right, it can be extremely beneficial to local government,” said Gregory Clark, former executive director of the Indianapolis Bond Bank. “[But] there’s so many things that could go wrong.”
Experts say using a bond bank can save communities money because the bank becomes a well-known entity with investors in the bond market. It can also make debt management more efficient because, rather than several city departments managing debt and separate bonds, all the bonds run through the bond bank.
Under state law, only first- and second-class cities—a designation determined by population—can create bond banks. Others are in Indianapolis, Mishawaka, Evansville and Hammond. The state also has a separate bond bank available to help smaller communities.
Brainard said the city pursued creating a bond bank because of its recent volume of small bonds—17, adding up to $250 million. The bond bank would allow the city to consolidate those and lock in lower interest rates, he said.
But Brainard didn’t ask the Carmel City Council to approve the bond bank’s creation. He said he didn’t have to because the council granted him that power by voting to transition to a second-class city.
The five-member board that oversees the bond bank has already met once and could sign off on a first round of bonds later this month or in April.
A bond issue of “$250 million gains a lot of attention,” Loren Matthes, a public finance adviser for the Indianapolis-based accounting firm H.J. Umbaugh & Associates, said at the Carmel Bond Bank meeting Feb. 29. “It will be good to get the city’s name out there.”
In most cases, a “qualified entity” votes to borrow funds for a project, program or other spending and sell bonds to the bond bank. In Carmel, that would require City Council approval.
A qualified entity is any taxing unit or district within the city, building corporation, leasing authority or political subdivision. For example, the Indianapolis Bond Bank serves Indianapolis, Marion County, the Capital Improvement Board and the Indianapolis Airport Authority, to name a few.
The bond bank then sells the bonds to investors and charges a small fee to the borrowing entity.
Those fees fund the bond bank’s annual budget, which can be used to pay staff salaries and travel reimbursements for board members.
Brainard has already suggested using the bond bank to issue debt for the Carmel Clay Public Library or Clay Township, a move that would help earn revenue.
The borrowing entity receives the funds and makes debt payments to the bond bank, which pays investors.
Bond banks are legally independent from city government. But the five-member board is appointed by the mayor, and the city’s top financial official (in Carmel’s case, its clerk-treasurer) can serve as executive director.
The agency is often able to negotiate lower interest rates because it is in the market more often than an individual city or other taxing unit might be. That could make a bond bank more trustworthy to investors, and it can combine several small bonds into one larger bond offering.
“You’re providing consistency in the market,” Clark said. “The investors recognize that name.”
He also said the bond bank can keep certain entities, like the Indianapolis Airport Authority and the city of Indianapolis, from competing for the same investors.
“The airport should be in the business of running an airport, not in the business of handling debt,” Clark said.
Deron Kintner, who served as executive director of the Indianapolis Bond Bank from 2010-2014, said a bond bank is a smart move for most qualifying cities with substantial debt, although he couldn’t put a figure on how much debt makes it worthwhile.
“If there are any drawbacks, they don’t have to do it,” Kintner said. “I generally think it’s a good idea and a cost-savings tool.”
While the bond bank won’t be responsible for the city’s policy decisions, it is responsible for maintaining relationships with investors, securing healthy interest rates and complying with finance regulations and disclosure requirements.
Clark cautioned that cities should not create a bond bank simply to have one. It should be staffed and the board should be composed of bond and debt management experts.
“It’s only as good as you’re going to make it out to be,” Clark said.
In other second-class cities with bond banks, the council approved their creation. Before Mishawaka created its bond bank in 2008, Mayor Jeffrey Rea sent a letter to council members.
“To create this entity will require approval of the common council in ordinance form,” Rea wrote. The sentence is underlined.
Clark also said he believes establishing a bond bank requires council approval.
State law says that in a second class city, "there is established a local public improvement bond bank." However, many second class cities don't in fact have one.
In addition, Carmel doesn’t intend to hire staff for the bond bank. Instead, Clerk-Treasurer Christine Pauley will serve as executive director. She said at the bond bank’s first meeting Feb. 29 that her employees are prepared to take on responsibilities on a volunteer basis.
“I could see where some might criticize that,” Clark said. “Bond banks aren’t funded by tax dollars. They’re funded by fees charged.”
And those fees are typically managed through the bond bank’s separate budget, another element Carmel hasn’t addressed.
Pauley said the board could adopt a partial budget for 2016, but it would be after the first bonds are sold. It likely won’t adopt its first full budget next year.
“I would think that Carmel would eventually get to that,” Clark said. “But I don’t know why there was such a need” to create the bond bank without working out the particulars.
Also, Carmel’s board members aren’t exactly well-versed in bond bank administration. Brainard said that wasn’t a factor in his selections.
The board includes two retired individuals, a young lawyer, an engineer and a real estate agent.
“I looked for a mix of people,” Brainard said. “I was pleased with this group because we got some younger people involved that had not served in an official position before.”
He said the board will rely on financial advisers when making decisions, so members didn’t need financial expertise.
“You’re not looking for people with particular expertise in bonds,” Brainard said. “You’re looking for people who will have the best interests of the community at heart.”
The Carmel bond bank’s first round of bonds is also unconventional. It would include funding for roundabouts, road projects, redevelopment infrastructure, and storm water and sewer improvements.
General obligation debt typically can’t be mixed with redevelopment debt or storm water or utility debt because payments are backed by different revenue sources. For example, general obligation bonds can be supported by pledging property tax revenue, while storm water debt is usually paid for through user fees.
“I don’t think that can fall under one transaction,” Clark said, clarifying that he did not know all the details of Carmel’s bonds. “I don’t know how they could have done that.”
Not for everybody
Even though any first- or second-class city is allowed to create a bond bank, only four, including Carmel, have done so.
Fort Wayne, with $910 million in outstanding debt obligations, according to the Indiana Department of Local Government Finance, doesn’t have one. A Fort Wayne spokeswoman said the city has done some research but not pursued a bond bank yet.
Noblesville, which has the fifth-highest amount of debt statewide at nearly $306 million, also doesn’t have a bond bank. The community only recently fully transitioned into a second-city class, but Mayor John Ditslear said a bond bank is not something officials have yet considered.
Fishers, with close to $274 million in outstanding obligations, also does not have a bond bank.
“We constantly look at responsible ways to manage the taxpayers’ dollars,” Mayor Scott Fadness said in a written statement. “One of those concepts may be a bond bank, but we do not have plans to move forward at this time.”•