Yankee Stadium’s conduit-bond boondoggle

By Felix Salmon
June 16, 2011
Is there something fishy about the bonds used to finance the parking lots at Yankee Stadium? Of course there is.

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Is there something fishy about the bonds used to finance the parking lots at Yankee Stadium? Of course there is. And you don’t need to look far before you see two big reasons why. The first is that the bonds were issued by the Empire State Development Corporation. That’s Empire State as in New York State, one of the most corrupt and dysfunctional states in the union. The second is that these are conduit bonds — an asset class which, as Nathaniel Popper explains, is only for the very brave:

Conduits have grown roughly three times faster than the general municipal market over the last five years, according to data from Thomson Reuters, a New York data firm; $84 billion of these bonds were issued last year alone…

Although conduits account for roughly 20% of all municipal bonds, they have been responsible for about 70% of all defaults in the municipal bond market in recent years, according to Income Securities Advisors, a Florida research firm. Over the last two years, the five municipal bond issuers with the most troubled bonds have all been conduit bond issuers.

Conduits constitute a brilliant boondoggle for everybody except the taxpayers who end up out of pocket. You want to build a parking lot next to Yankee Stadium? That’s probably not a great idea, as is evidenced by the fact that this season the lots are only 31% full on game days. Clearly Yankees fans are more than capable of attending games without needing to use anything like the 9,000 parking spots that Yankees management pushed for when they negotiated their new stadium. And parking lots are inherently ugly and unhappy things; Bronx borough president Ruben Diaz’s idea to build a hotel on some of that land instead is clearly a good one.

There’s no public interest in having all that space taken up with empty parking spots. So why on earth did New York State subsidize the construction of the lots by issuing $237 million of bonds whose interest payments are exempt from all state and federal income taxes? The people who bought those bonds financed a commercial venture and hoped to make a profit by doing so. If they did make a profit, there’s no reason at all for them not to pay income tax on that income.

Popper’s concerns about conduits in general go in spades for these parking-lot bonds:

“A lot of these are corporate bonds disguised as municipal bonds,” said Michael Lissack, a former municipal investment banker at Smith Barney who is now a critic of the industry. “How is this a good use of our tax expenditures? I would prefer to use that money seeing that kids get vaccinated or learn to read.”…

Frank Hoadley, who is in charge of selling traditional municipal bonds for the state of Wisconsin, said that the riskiness of conduit bonds has driven up borrowing costs for cities and states. He said Wisconsin paid $4 million more in annual interest than it would otherwise have had to on new bonds issued in January because of investor fears about the municipal market.

“Government issuers like Wisconsin are swept up in the smear that is tarnishing the whole municipal market because of conduit borrower problems,” said Hoadley, Wisconsin’s capital finance director.

The parking-lot project was particularly risky because it was structured with no equity. (Much like Goldman Sachs’s notorious Abacus deal, come to think.) All the money to build the lots came from tax-free bond investors, rather than the owner of the project, a tiny mom-and-pop nonprofit 100 miles from the Bronx which has a history of defaulting on tax-exempt bonds. Parking projections are notoriously error-prone at the best of times, but in this case the project was financed with a debt service ratio of just 1.2: the projections didn’t need to be far off before the lots ran into serious financial trouble.

The biggest winners in this story are the Yankees. They are luxuriating in the presence of endless parking infrastructure, they didn’t need to pay a penny for it, and they can offset the blame for misuse of public land by saying that it’s not their project and they don’t own the land. Even the bondholders will probably come out alright in the end. The losers are the general public, twice: first by dint of having to live with far too much parking provision, which serves no useful purpose in this urban environment, and second because of the tax break we gave the buyers of the bonds.

As a general rule, conduit bonds are always a bad idea. I’m no great fan of the tax exemption on muni bonds at the best of times — if the federal government wants to subsidize the states, there are much easier and more direct ways of doing that. But giving the tax exemption out for boondoggles like this is, well, mind-boggling. Let’s hope the latest wave of defaults helps speed their demise.


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I would have to agree that Salmon seems more self-righteous and speaks as though he is infallible these days. Maybe the blatherings of Ben Stein recently have gotten Salmon back up on the high-horse from his usual astute analysis and opinion…?

Posted by CDN_Rebel | Report as abusive

“Although conduits account for roughly 20% of all municipal bonds, they have been responsible for about 70% of all defaults”

So the default rate on conduits is tripple the rate on Munis overall eh… ok so that’s what a 0.75% default rate?

Those parking lots in the Bronx look like a better credit than most European sovs to this investor.

Posted by y2kurtus | Report as abusive

I wouldn’t say that conduit bonds are always a bad thing. The interest subsidy can be used to improve the economics of projects like pollution control equipment, improved water treatment, some renewable energy projects, or community hospitals, where the pre-subsidy returns available to the owners (non-profit, or for profit) do not reflect the social benefits. The tax system has frequently been designed to produce socially desirable outcomes. But conduits are spectacularly vulnerable to misuse, mostly because their oversight is so poor, they’re so susceptible to political interference, and because the range of eligible assets (needy and vulnerable stadium-owners, anyone?) is so broad.

Posted by gringcorp | Report as abusive

The data in the LAT piece is somewhat misleading: “conduit” bonds include borrowing for quasi-public purposes like non-profit hospitals and higher education (because 501(c)3s must partner with a public-sector “conduit” to access the muni market).

The 5-year growth trend they talk about, moreover, was primarily driven by a wave of refinancings by those 501(c)3s, who were larger users of auction-rate securities and bank-enhanced variable-rate products that needed to be restructured in the wake of the credit crunch — it didn’t represent a huge increase in debt outstanding.

As for the project today — the risks to taxpayers are overblown, and the risks to bondholders are serious (as demonstrated by recent trades in the 60-cents-on-the-dollar range). The garages won’t be making tax payments any time soon (or payments in lieu of taxes, to be more specific), but that can be said about many failing enterprises, public or private.

Posted by MikeStanton1891 | Report as abusive

The risk to the public is less the foregone tax revenue (on bond interest, land, or profits) and more that the conduits serve as a dumping ground for unpalatable projects serving ill-disclosed private and political interests. They also often facilitate the use, and often misuse, of public land for private purposes (as is the case here), or the expropriation of private property for private purposes with dubious public benefit (see, well, Atlantic Yards, for starters)

Posted by gringcorp | Report as abusive

What risk to the taxpayer? Unless there is an explicit guarantee by some taxing authority, there is no risk.

There are plenty of problems in the municipal market–like bid-rigging, off-balance-sheet instruments designed to disguise payola, and outright misstatement of finances. But conduits? Seriously?

Yes, conduits default at a higher rate than GO bonds. Moody’s studied defaults from 1970-2010 and found of the 18,000 issues rated, 54 defaulted. Three were GO bonds. Okay, point conceded. But it’s not much of a point.

But anyone that blames the sell-off in the muni market earlier this year on conduit bond defaults is a moron. A certain 60 Minutes interview with a certain Brown University graduate had a lot more to do with December’s sell-off and the 30 billion in mutual fund net withdrawals that followed over the next 6 months than any conduit default. Where is that wave of defaults, BTW?

Yes, I remember Felix also confidently asserting that California was about to go bankrupt and would receive another Federal bailout because it is Too Big To Fail. How’s that working out?

Posted by Publius | Report as abusive