How municipal bonds work, and a brief history of them in San Antonio

By Richard Webner | @RWebner | Heron contributor

In 2005, when Sheryl Sculley was recruited as San Antonio’s city manager, she got the sense that one of the things that the City Council liked about her was her experience putting together large bond packages, as she had done as assistant city manager in Phoenix.

The council “had practically salivated over my track record,” she writes in her memoir, “Greedy Bastards: One City’s Texas-Size Struggle to Avoid a Financial Crisis.” “Council wanted some of that big-bond energy in San Antonio, which had been elusive to them before.”

During her first year on the job, the council asked her to come up with a billion-dollar bond program, she recalls. After analyzing the city’s finances and consulting with the business community, she recommended they limit it to $550 million to avoid raising taxes.

In the end, the city would have to wait another 15 years for a billion-dollar bond, until February of this year, when the City Council unanimously approved a package that would fund a $1.2 billion wish list of improvements—borrowed over five years—to the city’s physical and cultural infrastructure, ranging from utilitarian projects such as drainage ditches and street repairs to splashy ones such as a $106.5 million expansion of the city’s greenway trails system. For the first time, the package includes an affordable housing component, to the tune of $150 million.

Early voting continues through Tuesday. Election day is Saturday, May 7.

Judging by the recent history of the city’s total bond packages, it is likely to pass. In the years since Sculley revamped the bond process—introducing the now-familiar five-year cycle in 2007—three such packages have gone before voters, and they have all passed with overwhelming support.

It’s no surprise that council would “salivate” over Sculley’s skill in assembling bond packages, as she put it. For as long as it has been a city, San Antonio has suffered due to its inadequate drainage and transportation systems, especially in historically Black and Hispanic neighborhoods around downtown. The five-year bond process offers a way to remedy that, supporters say, and to help the city accommodate its rapidly-growing population.

Opponents of large bond packages have argued the city is incurring too much debt, or they criticized specific projects within the package as too expensive or unnecessary. The city often counters with several points, including its high credit ratings, its delivery of previous bond projects, and the fact that it’s still borrowing “well below” the cap for property-tax backed debt allowed under the city’s charter.

As early voting continues, the Heron takes a close look at some of the questions that often don’t get answered in coverage of the bond package, such as: Why does the city pay for infrastructure the way it does? And what are bonds, and how exactly do they work?

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Bond package history

Here are glance at San Antonio’s large-scale bond packages:
» 2022-2027 bond package: $1.2 billion — undecided
» 2017-2022 bond package: $850 million — voter approved
» 2012-2017 bond package: $596 million — voter approved
» 2007-2012 bond package: $550 million — voter approved
Source: City of San Antonio

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Municipal finance 101

The city has two primary methods for financing infrastructure and economic development projects.

General fund

One is to pay for them through the general fund in its annual operating budget. In September, the City Council approved a $3.1 billion budget for the current fiscal year, including $1.36 billion for the general fund, which pays for basic services such as police and fire protection, street maintenance, parks and libraries.

The bulk of the general fund—about 63 percent in the current year, or $859.8 million—pays for police and fire services, including salaries, pensions and healthcare for officers at the San Antonio Police Department and firefighters at the San Antonio Fire Department. A smaller portion—about 7.7 percent, or $104.7 million—went toward streets and infrastructure, while about 4 percent, or $54.2 million, paid for maintenance upgrades at parks.

Most of the revenue in the general fund comes from three sources: sales taxes ($336.5 million in the current fiscal year, or 25.3 percent of the total $1.36 billion general fund); property taxes ($410.4 million, or 30.8 percent); and revenue from CPS Energy, the city-owned utility ($361.2 million, or 27.1 percent).

Municipal bonds

However, most of the big infrastructure projects come out of the city’s bond program.

Why does the city have to issue hundreds of millions of dollars in bonds? Why can’t it pay for all of its new streets, culverts, sidewalks and parks through the general fund?

For the same reason that you buy lunch with cash from your wallet while you take out a loan to buy a car, or a house, or a college education.

“You can make the comparison to a household budget. I can do a household budget for a month—incoming money kind of matches outgoing money, plus the rainy day fund, right? But for big purchases, I can’t do it like that,” said Christine Drennon, an associate professor of sociology and anthropology and director of the urban studies program at Trinity University. “If I want to buy a car, if I want to buy a house, I have to go to the bank and borrow. It’s the same thing for the city, but we just call it bonds.”

Former District 1 City Councilman Roberto Treviño put it another way: “The way we looked at it, when I was there, was that some projects are of a large magnitude and require such a large sum of money that it can be determined that it’s too big of a hit on the annual budget—that it has to go to bond level so that you can secure that much money, and you’re able to fulfill the request.”

Among the more than 180 citywide projects in the $1.2 billion bond, an average of $10 million would be spent to fix the most deteriorated streets in each district; $18 million would go toward Hemisfair’s Civic Park project; $12.5 million toward the Carver Branch Library renovations on the East Side and $5.2 million for Las Palmas Branch Library on the West Side; the potential for a new animal hospital; two new fires stations; and a new police substation. Download the city’s bond guide for a full list of projects.

And just as part of your household budget might go toward paying the mortgage bill, part of the city’s budget is devoted toward servicing its bond debt and is included in the capital fund. According to the adopted budget for the current fiscal year, the city expects to pay $265.6 million over the course of the year for that purpose ($187.7 million toward paying off the principal, and $77.9 million for interest for debt already incurred from past bonds).

Where does the money come from to pay off the debt? Property taxes. The city’s property tax rate is 55.827 cents per $100 of valuation. Of that, the city uses 34.677 cents for maintenance and operations, and 21.15 cents for debt service.

Let’s look at that in real terms: Imagine you own a home in San Antonio worth $250,000. With no exemptions, last year you would have paid about $1,396 in property taxes to the city. Of that, $867 would have gone to maintenance and operations in San Antonio, and $529 toward paying debt.

Tax increment financing

The city has other tools to pay for infrastructure—for example, tax increment reinvestment zones (TIRZs), which are areas across the city where the increase in property tax revenue is collected and reinvested in the zone, as its name suggests, in the form of improvements to streets and parks or affordable housing. Some downtown projects that were considered for the most recent bond ended up being funded instead through a TIRZ.

…[ Editor’s note: Since October, on three occasions, the Heron has requested an interview with the city’s Chief Financial Officer Ben Gorzell for this piece. It was never granted. ]

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Types of municipal bonds

Municipal bonds have a history going back to the Renaissance, when Italian city-states borrowed money from the major merchant banking families, according to “The Fundamentals of Municipal Bonds,” published by the Securities Industry and Financial Markets Association.

In the U.S., the first officially-recorded municipal bond was issued by New York City in 1812 to build a canal. By the 1840s, many U.S. cities were issuing debt.

The city of San Antonio was issuing bonds for public improvements as early as 1887, said Heywood Sanders, a professor of public administration at the University of Texas at San Antonio. In the late 1800s, the city used bonds to build streets, sidewalks, school buildings, fire alarms and the sewer system.

“Our water system was built privately by Mr. Brackenridge and his company, but once we had water delivered to houses by pipe rather than acequia, we ultimately needed, for public health purposes, a sewer system, so we borrowed to build a sewer system,” Sanders said.

Municipal bonds, in one form or another, paid for many of San Antonio’s most prominent landmarks, he said: The Olmos Dam; the Municipal Auditorium (later converted into the Tobin Center for the Performing Arts); the bridges over the San Antonio River in downtown; the San Antonio International Airport.

What sets municipal bonds apart from other securities is that the interest paid on them is exempt from federal taxation, which makes them more appealing to investors. For this reason, they are often referred to as tax-exempt bonds.

More recently, the city has used bonds to fund major projects such as the latest addition of the Henry B. Gonzalez Convention Center, and the Grand Hyatt across the street.

But not all of these projects were financed the same way—just as there are different kinds of loans, there are different kinds of bonds.

General obligation bonds

The $1.2 billion bond package on the May 7 ballot will consist of what are known as general obligation bonds, or GOs. A general obligation bond is a bond that is backed by the taxing power of the government issuing it—in other words, the government promises to pay back the money it borrows through the taxes it collects. San Antonio is typical in that it uses property tax revenue to service the debt.

“The bondholders have, in essence, a first lien on the city’s revenue. And the direct source of those revenues is a fraction of the city’s property tax,” Sanders said. The bonds “have the greatest assurance of repayment, and hence, in general, the lowest interest rate. They are the most secure from the standpoint of the bond rating agencies and the bondholders.”

One important feature of general obligation bond projects is that they must, under Texas law, be approved by a majority of voters.

[ Download the city’s 2022 Debt Management Plan ]

Revenue bonds

Another type of bond, often used by the city, is a revenue bond. These bonds are repaid through a specific type of revenue typically tied to the project they are funding. Like general obligation bonds, revenue bonds require voter approval.

In 2015, for example, the City Council voted to issue nearly $124 million in revenue bonds to finance the construction of the new rental car facility and skybridge at the San Antonio International Airport. The bonds were secured by the airport’s customer facility charge. City Council recently approved a new plan to revamp the airport through such bonds.

The $325 million expansion of the Convention Center that was completed in 2016 was another revenue bond project, backed by proceeds of the city’s portion of the hotel occupancy tax.

Certificate of obligation

The city also makes use of a form of debt known as certificates of obligation, which can serve a wide range of uses, such as building public works, paying for services, or buying land, machinery or equipment.

Unlike bonds, they have only been around since the ’70s—and they don’t require voter approval.

“The state law says that for short-term public works facilities or those deemed to be an emergency, the certificates are allowed, and it’s pretty generous,” Sanders said. “So the decision on what to fund that way is often a function of what somebody wants to do.”

In recent years, the city has used certificates of obligation to fund a $38 million rehabilitation of City Hall. It had planned to use certificates of obligation to fund its $32 million portion of the streetcar system that it had considered building with Bexar County in the early 2010s, before the effort failed.

For politically controversial projects, certificates of obligation have the advantage of not requiring them to be presented to voters for approval, Sanders said.

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How the process works

Last August, the city of San Antonio issued a 363-page statement announcing that it would issue $128.5 million in general improvement bonds, which can be viewed on the city of San Antonio’s website, resulting from the 2017-2022 bond program.

At the bottom of its title page is a list of six firms that worked as underwriters on the bond issue, including JP Morgan, Austin-based SAMCO Capital and the financial services firm Siebert Williams Shank, which has former Mayor Henry Cisneros as its vice-chairman. In June 2017, after a competitive bidding process, the council selected the six firms and 12 others to serve in a “financial underwriting pool” to underwrite its $850 million, 2017-2022 bond issue.

What do underwriters do? In a bond issue, the underwriters make bids to buy the bonds of the issuer (or, in our case, the city of San Antonio) and sell them to investors.

“The underwriter functions as the quarterback of the deal by coordinating the traders, the sales people and all the members of the syndicate,” it says in “The Fundamentals of Municipal Bonds.”

Here are some other entities that typically play a role in the bond process, as written in “The Fundamentals of Municipal Bonds:”

» Traders maintain a market for securities by buying bonds and selling them to dealers and investors.

» Bond insurers enter a legal commitment to pay off the bond debt in the event that the issuer is unable to make payments on time.

» The investors in a bond issue could include mutual funds, commercial banks, insurance companies or even individual households.

The top of the city’s bond issue statement includes its bond rating: AAA from Moody’s and S&P, and AA+ from Fitch. Former city manager Sculley has said that she considers the city’s AAA bond rating—which allows it to get lower interest rates on the debt it issues—as one of her greatest accomplishments as city manager.

City of San Antonio current bond ratings

If you’re looking to learn about San Antonio’s demographics, economy and system of government, you could start by reading one of the bond statements. It includes a list of the city’s elected officials and its top staff members as well as 22 densely-typed pages describing the largest employers in the local economy and how the city government works, including its pension liabilities. There is an appendix with demographic information and a timetable of the city’s population going back to 1920.

The city’s bond statements can also be viewed on the website of the Municipal Securities Rulemaking Board, a regulatory organization overseen by the Securities and Exchange Commission.

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Sculley’s legacy

The city’s bond programs are a legacy of Sculley, who transformed San Antonio’s government during her tenure as city manager from 2005 to 2019. In effect, she created the five-year bond process and its system of choosing projects via citizen committees that the city uses today.

In her memoir, “Greedy Bastards,” she describes the reforms that she put in place to give the city a more disciplined process for issuing bonds.

She had already “borne witness” to the lack of financial discipline for previous programs, she writes. She recalls that a city employee overseeing one of the bond programs called her and asked for more money because it was over-budget.

“The answer from me was ‘No,’” she writes.

“Many of the staff needed retraining on managing capital budgets,” she writes. “Anyone who gets near a bond program in San Antonio today knows that we accurately represent what a project will cost, ask for that money upfront, obtain approval, and then manage the project to budget. A contingency fund is included, but if the project exceeds its budget, then it’s time to decide what you’re going to cut from the project scope. In 2006, though, this was genuinely a new concept for the city.”

She also proposed a “robust” process of seeking input for bond projects from local residents. She writes that this process was beneficial not only because she wanted the input, but because it educated the residents about the projects: “I also knew we were creating an army of people who would then return to their neighborhoods, schools and places of business as advocates for the bond program.”

Sculley and then-mayor Phil Hardberger, who had lured her from Phoenix, proposed a new financial strategy for the city that included a bond program every five years. “With each program, we upped the ante,” she said, expanding it to $596 million in 2012 and $850 million in 2017.

The current bond program is the first to face voters since Sculley retired in 2019—but it continues the trajectory she put in place, with a scope of $1.2 billion.

“Fifteen years ago, good contractors didn’t want to work for this city,” she writes. “That surprised me when I arrived from Phoenix, where we were an employer of choice for contractors because we managed projects well and always paid on time. Today the same is true in San Antonio, and I couldn’t feel prouder.”

Richard Webner is a freelance journalist covering Austin and San Antonio, and a former San Antonio Express-News business reporter. Follow him at @RWebner on Twitter
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