Less than a month after it passed the state House — and a week after that chamber approved a competing measure — a bill that sought to stop metropolitan district developers from buying municipal bonds they or their affiliates approved for sale while serving on the community’s board of directors was killed by a Senate committee Tuesday.
House Bill 23-1090 faced near-certain death by the Senate local government and housing committee, which in February passed a bill that allows the practice HB23-1090 sought to prevent. Senate Bill 23-110, which in part allows developers to continue buying their own financing, was sent to the governor's desk on Friday.
The committee killed the bill, 4-3, following more than three hours of testimony.
Metro district developers instead rallied around SB23-110, which provides greater financial disclosure to homebuyers but also allows them to continue purchasing municipal bond financing developers approved for sale while sitting as a metro district's board of directors.
The bonds, sometimes known as developer bonds, are different than those a metro district approves for sale to the general public. Frequently in smaller denominations, they are privately sold to the developer, and, though they mature in as many as 40 or 50 years, are not paid right away. That allows them to pile up interest upon interest — not unlike a consumer who only pays the minimum amount on a credit card — and ultimately a huge pay-off amount that is demonstrably greater than the interest rate on its face.
Regular municipal bonds are often sold to investors, such as public pension funds, and are paid off in regular increments over their term — not unlike a mortgage, and yield the interest rate that was advertised.
The bonds are big business. Currently, it's estimated that metro district residents are responsible for repaying about $10 billion in public financing costs, most of it owned by investors, such as pension funds, with nearly $1 billion of it paid directly to developers.
"Only in Colorado is it considered ethical for developers to serve as board members to issue tax-supported government bonds to themselves, based on terms that they alone set," attorney and metro district expert Brian Matise said.
Although several people tied to the metro district industry testified, none was a board member who purchased their own bonds. That left bill co-sponsor Sen. Robert Rodriguez, D-Denver, puzzled.
"We don’t have the people buying their own bonds and the conflict of interest that exists testifying today," he said. "It’s always the bad actors who make it bad for everybody and this bill applies to those people."
Proponents of HB23-1090 said developer bonds are a blatant conflict of interest, with a developer working both sides of a financial transaction that requires homeowners to pay back. Homeowners frequently get no vote on whether the bonds should be sold — or whether the developer gets to buy them — because the transaction happens long before a single home is actually built.
The bond money is used to reimburse developers for the costs of putting in a new metro district's infrastructure, such as sewers, lights and roadways. Several developers testified that not allowing them to purchase the financing will ultimately hurt affordable housing in Colorado. None who testified had actually ever purchased the bonds from their own projects.
Several opponents of HB23-1090 — and proponents of SB23-110 — testified that allowing developers to purchase their own bonds is a critical tool in ensuring the independent, quasi-governmental metro districts, the primary method used to build new residential housing in Colorado, are able to build that infrastructure.
But none gave specific examples about why buying bonds they approved as metro district managers was necessary or beneficial. The bonds often take the place of reimbursement agreements the developers signed with the metro district they created. Those taxable deals, some have said, are risky because future resident-controlled boards might choose not to repay them. Swapping them for municipal bonds tied to property taxes is more secure and nearly impossible to undo.
As with SB 23-110, committee member Sen. Julie Gonzales, D-Denver, stood as a strong voice against the practice of developer-purchased bonds. She failed to remove the portion of that bill that allowed the developer-bond practice. Similarly, HB23-1090 co-sponsor Rep. Mike Weissman, D-Aurora, unsuccessfully tried to remove the section when the Senate bill was being heard in the House.
On Tuesday, Gonzales railed at how elected officials of metro districts are allowed a practice that any other elected official in Colorado is barred from doing.
"It simply makes no sense to me," she said.
SB 23-110 also looks to shore up several transparency practices within metro districts, including requiring annual meetings where managers must tell homeowners the status of the development as well as its financing. Additionally, the bill would require a metro district homeowner selling their property to let buyers know where to find information about the district.
Other items in the bill — disclosing mill levy maximums as part of service plans initially approved by cities and counties — are already a required practice.
The Senate bill limits developers to an interest rate return that is at or below market rates and require a financial adviser to file an opinion about it. But when a bond is repaid using compounded interest, not unlike an unpaid credit card, the effective interest rate return is much higher.
Another relevant bill, HB 23-1065, which would place metro districts under the authority of the Colorado Ethics Commission — a nod to the concern over developer-purchased bonds — is awaiting a hearing by the House committee on appropriations.
Another bill, HB 23-1105, awaits a similar hearing. It would establish task forces to study problems involving metro districts and homeowner associations, as well as potential solutions.
