Premium bond sale stirs controversy in Vermont

The use of premium bonds has ignited a dispute between Vermont’s most populous city and the state auditor.

The state auditor found that the city of Burlington issued more debt than it was approved for under the state’s tax increment financing law and made more than a million dollars of accounting errors.

The city’s Downtown Tax Increment Financing district, by selling premium bonds, issued $4.6 million more in debt than it was approved for, according to an audit report published earlier this month. This means Burlington and taxpayers citywide may have to foot the some of the debt service bill rather than using property tax revenue from the TIF district. 

“The headline finding of this audit is bogus,” Burlington Mayor Miro Weinberger said.

City of Burlington

Vermont’s tax increment financing system was created in 1985, when cities were losing a lot of federal grant money and voters were not willing to pay more in taxes to make up the difference. Through the TIF programs, if a municipality wants to make infrastructure investments in a defined area — water or wastewater upgrades, for instance, or building a sidewalk or parking garage — it can fund them through future property tax revenue growth in that area.

In Vermont, some property tax revenue goes to municipalities’ general funds and the rest goes to a statewide education fund. The municipality applies to finance an infrastructure project through the TIF program, gets approval from the Vermont Economic Progress Council, gets approval from voters, then issues bonds to fund the project. When the infrastructure project creates additional property tax revenues, the municipality can keep 75% of the revenue that would have gone to the general fund and education fund and use it to repay the bonds.

In 2021, the VEPC approved Burlington’s economic plan to issue $30 million of bonds financed through the Downtown TIF, according to the auditor’s report. But when Burlington brought the bonds to market in 2022, investors were willing to pay a premium and Burlington raised $34.46 million — $4,376,971 million more than it was approved for. The City disclosed estimated interest cost of $4,000,000 but the actual interest cost for the premium GO bond issued in August 2022 is $11,844,433, according to the state auditor’s report.

Because the city didn’t get approval from the VEPC to issue an additional $4 million in debt, the audit recommended that it cannot use property tax revenue from the TIF district to repay the excess.

The city disagreed with the audit’s findings, arguing against them in statements included in the audit report and in a press release last week.

“The headline finding of this audit is bogus and reflects Auditor Doug Hoffer’s longstanding campaign against the State’s TIF program,” Burlington Mayor Miro Weinberger said in his statement. “It’s completely unreasonable for the Auditor to suggest that Burlington has made a ‘misstep’ and exceeded an approved cap — especially after failing to note any prior concern about the City’s use of bond premiums last year when auditing Burlington’s Waterfront TIF district.”

Thomas Melloni of the firm Paul Frank + Collins, Burlington’s bond counsel, argued in a response included in the audit report that the city was within its rights to offer bonds at a premium and it should be allowed to use TIF revenue to repay the extra $4 million.

“Over the last several years with the low interest rate environment, it was fairly customary in the municipal market for issuers, not only the City of Burlington, to issue bonds with a 4 or 5% coupon rate in exchange for a premium in addition to the principal amount of bonds being issued,” Melloni wrote. “The State of Vermont recent bond issues in 2021 and 2023 were sold with a premium.”

Melloni also said that the TIF statute and the TIF rule state that the bonds may be issued at “not less than par,” which he claimed meant they may be issued at a premium. 

A premium bond is defined as one for which market value is greater than its face value.

The city sold the bonds in question in 2022 through a competitive sale. The par face value on the official statement is $30.1 million; the bonds, with 5% coupons, priced to yield between 2.2% and 3%, with every maturity pricing above par and the 2032 maturity capturing the highest premium, pricing at 121.17% of par to yield 2.6%, according to data posted on the Municipal Securities Rulemaking Board’s EMMA disclosure website. 

Melloni argued in his response to the auditor that interest rates changed very rapidly around the time of the 2022 issuance and if Burlington had waited for VEPC approval, it would have ended up paying higher interest rates.

“PFM, the City’s municipal advisor, reported that in the case of the Series 2022 TIF Bonds, the interest rate scales, coupons, reoffering yields and underwriting compensation received for the Series 2022 TIF bonds are fair and favorable to the City. PFM stated that the final all-in true interest cost of 2.9262% for the Series 2022B Bonds was favorable to the City in light of prevailing market conditions.”

The VEPC’s response to the audit, which was included in the report, concurred with the state auditor’s recommendations. In August, in light of the audit, the VEPC passed two resolutions, one of which amended the TIF Rule “to explicitly require disclosure of bond premiums and associated increased debt services in District Finance Plans and public informational notices.”

State Auditor Doug Hoffer said that Burlington’s objections didn’t hold legal merit and the personal attacks offended him. He added that the TIF program is unnecessarily complicated and this isn’t the first time a municipality has claimed it has more control over TIF funds than it really does. 

“The mayor, for his part, and his staff, throughout the audit were very upset with us, because we kept saying, ‘Where’s your authority to do this?'” Hoffer said. 

“And they said ‘Well, we’re the city of Burlington, both in our charter and in state statute we have the authority to do this kind of financing,'” he said.

“We said, ‘Yes, we know that,'” Hoffer said. “‘But where’s your authority to do it under TIF?'”

In Vermont, the state auditor is an elected position. Hoffer, a Democrat, was first elected in 2012 and has been reelected every two years since.

The audit also found several accounting errors in Burlington’s use of TIF-related funds between fiscal years 2017 and 2023. Thanks to calculation errors, Burlington allocated $95,363 to the Downtown TIF fund that it should have sent to the Department of Education. It also sent $295,331 to its general fund that should have gone to the Downtown TIF fund. Burlington said it intends to pay what it owes to these funds.  

The city also told VEPC in 2020 and 2021 that it would deposit a fee from Champlain College into the Downtown TIF fund, but it failed to deposit this fee. When VEPC learned about this in August, it voted to reduce the amount of tax revenues that the Downtown TIF fund can keep, from 75% to 69%. 

Vermont’s attorney general declined to weigh in on whether the law allows Burlington to issue more debt than VEPC approved. 

Last year, Hoffer audited Burlington’s Waterfront TIF district and found millions of dollars in mistakes. Hoffer said that cities’ repeated failures to comply with the TIF program shows that it’s not an efficient or cheap method of financing infrastructure.

“It would probably be a lot easier if we just put the money in a revolving loan fund,” and let Vermont’s Economic Development Authority distribute the money to cities, Hoffer said. “I believe they could do this and save the cities a lot of money in interest costs.”

Although Burlington’s bond issuances are the point of contention, none of the outcomes will affect bondholders, Hoffer said. VEPC may agree to let Burlington repay its unauthorized bonds through TIF revenue, but if it doesn’t, Burlington will repay the debt through its general fund, even if it has to raise taxes to do so. 

The bonds carry a double-barreled pledge from the TIF district and the city’s general obligation. According to the official statement, “in the event such tax increment revenues are insufficient, the Series 2022B bonds are secured by the full faith and credit of the city.”

Nicholas Lehman, Moody’s credit analyst for Burlington, said the Aa3-rated city has healthy finances, and its budget is big enough that the audit is unlikely to have much financial impact. 

Lehman declined to comment specifically on how the audit’s findings could affect Burlington’s credit rating, but he said it falls under the credit factor of management. 

“Is it a recurring issue? Does it speak to concerns with the financial management and how the city is run on a broader level?” Lehman said. “That’s where this type of issue really falls into our analysis, a little bit more qualitative in nature to try to assess that risk or how big of an issue this is.”

Analysts will look at the audit report and third party audits to see whether the bookkeeping errors and misinterpretations of laws are indicative of a larger issue, Lehman said. Analysts also consider whether the city plans to improve accounting procedures to stay in compliance with state law. 

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