Last month, scandal erupted at the New Mexico Finance Authority. Top officials at the state agency were arrested on Aug. 8; last week, a grand jury indicted its controller on multiple counts of fraud and forgery—exposing an alleged cover-up of $40 million in revenue losses at the agency.
Before the scandal, NMFA cut a relatively low profile. It’s partially funded by approximately $26 million annually in taxes the state collects. But to local governments, NMFA is essential: It provides cut-rate financing for much-needed infrastructure projects. For smaller communities without the money or savvy to take on Wall Street, NMFA’s large pool of state funds and expertise were invaluable.
Santa Fe offers a case in point: In opting to buy the College of Santa Fe in 2009, the city had two choices: issue a $30 million bond proposal to voters, or borrow that amount from NMFA. Records show it opted for NMFA financing, presumably (or hopefully) because it got a better deal. As of this June, the city had $28.3 million outstanding with NMFA for the purchase.
That system worked for any local government entity with a less-than-stellar credit rating: NMFA, with its good rating and large pool of money to invest, could land a more attractive interest rate. In return for putting out the bond itself, NMFA charges local government bodies a low fee.
Mike Zavelle, chief financial strategist for NMFA, uses the example of a community with a single-A credit rating (still investment-grade, but not the best rating) that needs a $15 million loan. By using NMFA’s solid credit, it can save $1 million over the life of that loan.
“That’s just one loan,” he notes.
As of April, the agency has issued 655 such loans to local governments, for a total of $1.4 billion. Larger cities with good credit, such as Albuquerque or Santa Fe, can use NMFA for projects that aren’t highly regarded by investors, like airports.
Now, however, the program is on the rocks. Ever since the scandal broke in August, local government entities that rely on NMFA for financing have been forced to delay capital projects that needed funding from NMFA. The agency’s announcement that it would temporarily put on hold loans of more than $5 million.
But as local governments have been forced to look elsewhere for funding, they’ve come across a surprising trend. Many say they’re getting better or similar deals on loans without NMFA—raising the question of why anyone used NMFA in the first place.
For instance, in Albuquerque, officials originally went to NMFA for $27 million to support a special assessment district. The city of Las Vegas had also sought an NMFA loan for a dam.
“Albuquerque said they’ve reported getting pretty much the same rates as the Finance Authority,” Zavelle recently told SFR. “Las Vegas is doing better than going through [NMFA].” (NMFA did, however, help Las Vegas get public funding for its project.)
Santa Fe is no exception. In an Aug. 28 meeting, city councilors voted unanimously to go it alone in issuing a bond to finance the $3.6 million purchase and $1.4 million renovation of the second floor of the Railyard’s Market Station building.
(The building is slated to become city offices by next spring. The city’s decision earlier this year to purchase the building from Railyard Co. raised concerns that the city was effectively bailing out a private company [news, April 25: “Third Rail”].)
The city council had originally planned to finance the Market Station deal through NMFA. But after the scandal broke, the bond proposal was put on the table. On Aug. 20, city Finance Director Mel Morgan told the finance committee that issuing a bond would actually cost less than a NMFA loan—to the tune of $50,000 in annual debt-service costs.
Karen Heldmeyer, a former city councilor and critic of the Market Station deal, wonders why the councilors originally sought to finance the project through NMFA.
“Starting from the back: if [issuing a bond] was going to be cheaper than NMFA, and they knew that—and they should have known that—then they shouldn’t have done this in the first place,” Heldmeyer says.
Morgan says the city was in contact with NMFA and felt it could get a better interest rate from the agency, which was estimated to be 3.04 percent. He says that if the scandal at NMFA hadn’t exploded, the city still might have gotten a better deal through NMFA than on its own.
“If, if, if,” he says. “NMFA was designed to pool all the resources and get a much better rate—and for many years it worked that way…Given all the junk that happened, the rates are going up.”
To pay for the Market Station deal—which Morgan defends by saying the costs for the lease at the federal building were slated to increase significantly—the city will borrow money from its 2013-14 capital improvement fund, and then use the money from the bond proceeds to replenish that fund. Morgan says the finance committee must approve the bond ordinance in its upcoming meeting before it can put it on the market, which will take at least 90 days.
Once the scandal clears, cities like Santa Fe hope to continue to use NMFA, whose credit rating Zavelle predicts—and hopes—won’t be affected by the scandal. Santa Fe, as of June, had nearly $62 million in outstanding loans with the agency.
“It’s huge,” Morgan says of NMFA’s importance. “You get a much better rate and borrowing term.”
Editor's note: A previous version of this story did not make clear that the stated "$40 million in revenue losses" is an allegation, not a fact. Mike Zavelle asserts that the roughly $40 million the agency had allegedly misreported was not a loss in revenue, but a reversion of that revenue to the state. SFR regrets the error and will publish a blog post clarifying the revenue situation.