Environmental groups look at new way to tap state bonds

In December, the Sonoma Ecology Center found out with little warning that the state would be freezing about 70 percent of its budget. The environmental non-profit was to receive grant funding for various projects, with most of the money going towards staffing. Two months later, five staff members are still “on furlough” – basically laid-off – and 18 are on reduced hours, which may mean half time or less.
“It’s a huge impact,” said Richard Dale, the executive director.
The center’s projects are just part of some $7 billion worth of bond-funded state projects that are currently on hold – everything from school construction to the installation of carpool lanes on Highway 101 here in Sonoma County. The state still owes Sonoma Valley Unified School District about $800,000 for the construction of the multi-purpose room at Sonoma Charter School, due to the same problem.
The stoppage is not an arbitrary command, but rather a response to a unique market reality. For the first time ever, the state of California hasn’t been able to sell its bonds.
“The treasurer has never had a problem selling the bonds in the market before,” said John McCaull, a local lawyer who has been following this issue. “It caught all sectors by surprise. It’s part of the larger budget problem, but also unique. It’s a seismic change that won’t be sorted out in months, maybe in years.”
The state usually bundles many projects together through the Pooled Money Investment Board (PMIB), then issues a single large bond offering. By pooling projects in this way, the state can usually get a lower interest rate. Bonds are generally one of the most reliable sources of funding and California has been relying on them for infrastructure projects for decades.
However, the budget negotiations hit California’s credit rating hard and, coupled with the contraction of the credit market, the state hasn’t been able to issue bonds since June 2008.
The new circumstances are inspiring new innovation. A number of environmental groups are working with State Treasurer Bill Lockyer to see if they could bundle together a smaller pool of bonds to get the money flowing for projects. The idea is that instead of issuing 30-year bonds in the billions, that the treasurer would issue some short-term bonds in the millions – a bundle of environmental projects in northern California or even just Sonoma County. The critical piece is matching investors, most likely environmentally minded, with a competitive investment opportunity.
The simple idea is not necessarily easy to implement, if only because it hasn’t been done. The bonds would probably be for a period of 18 to 30 months and might offer a very good interest rate to investors, but there’s no way to know how the market will value them until they actually hit the market.
McCaull is closely watching the first similar bond issuance, which is $200 million to keep active nine partially complete transportation projects. The Metropolitan Transportation Commission recently authorized the Bay Area Toll Authority to buy general obligation bonds from the state treasurer over the next three years. It still hasn’t been set what interest rate the state will pay the toll authority for the bonds. The negotiation should save the state tens of millions that it would lose if it had to stop projects in progress.
“In the end, it’s about a movement that I’ve dedicated my whole life to,” said McCaull, who does lobbying work for the Sonoma County Water Agency and the Sonoma County Agriculture and Open Space District, among other clients in the environmental sector. “I feel so grateful here in Sonoma that there’s a lot of interest developing in figuring out how to do this.”
Environmental projects, like highway construction, can also be affected very negatively by stop-work orders, especially when they utilize matching funds that must be spent in a tight time frame.
McCaull said that issuing smaller bundles of bonds probably wouldn’t be a long-term solution for California, as the state would pay a higher interest rate and the smaller issuances take more work. However, the state has learned one important lesson – it can no longer rely entirly on traditional bond funding.
So far, the Sonoma Ecology Center has been able to maintain its education programs, which have a different funding source, and the nonprofit is trying to increase direct donations and take advantage of staff know-how to identify clients for its mapping and other technical services.
“Look at crisis as an opportunity – we’re trying to do that,” said Dale.