Connecticut yesterday offered its first certificates of participation for a capital project, some $36 million of lease-backed securities, which made an unusual market entrance under the aegis of the state's Commissioner of Public Works.
The transaction, skirting the state's normal process for bond authorizations, is as controversial as it is novel.
"To the best of my knowledge, this is the first time there's been a public offering of a COP in the state," said James L. Pfeffer, senior vice president at the deal's senior manager, Advest Inc.
"It may very well be the last," he added. "It may be that the state does not intend to make a habit of financing public buildings using this vehicle."
The offering has sparked differences between the state's department of public works and the state treasury as to whether the certificates are a convenience or a waste of money.
According to state law, projects financed by debt securities normally go through a course of approvals by the state's General Assembly and by a bond commission, whose 10 members include representatives of the governor, the treasurer, and the legislature.
But in this case, the state's department of public works agreed to build a new courthouse without informing other branches of the state government.
"It was an end-run around the debt limit, around the bond commission, and around the finance committee of the legislature. It was an end-run around the capital budgeting process," said Benson R. Cohn, the state's assistant treasurer for debt management.
Officials at the department of public works disagreed. "It is a model of cooperation, and we hope that it would be emulated in other such projects in the state," said Patrick T. Nolan, a spokesman for Connecticut's Department of Public Works.
Mr. Nolan was referring to cooperation among several parties involved in the project, including the city of Middletown, developers, builders, and the state's judicial department.
Mr. Cohn said he disapproves of certificates of participation in general because they boost costs and create busy work for his staff. The $36 million certificate of participation deal, he said, prequired the same amount of time from his staff as a $1 billion GO offering would.
In addition, he said, because the financing is "a stand-alone issue," rather than part of a larger package, the state will not benefit from economies of scale in raising capital for the courthouse.
When asked how the deal escaped the scrutiny usually applied to the state's bond-funded projects, Mr. Cohn said the transaction was already in motion before the state treasury or the governor's budget office knew about it.
"Essentially, it evolved from leases to lease-purchases that the public works department was doing, without the budget office really recognizing that they were financing," Mr. Cohn said. "Public works was very far along with the project before we or [the governor's Office of Policy and Management] were really aware of it."
The Advest syndicate priced the securities to yield from 4.70% in 1994 to 6.55% in 2013. The securities are rated triple-A by both Moody's Investors Service and Standard & Poor's Corp., based on insurance provided by the Municipal Bond Investors Assurance Corp.
Mr. Cohn said that while he disapproves of certificates of participation, the interest rates on the borrowing show that "the team working on it did a very fine job of getting us a good deal."
Proceeds of the certificates will finance a new state courthouse in Middletown, along with a garage, for the state's judicial department.
The state has existing courthouses in Middletown, but they do not provide enough space. According to the preliminary official statement, judges have to conduct trials "in inappropriate settings," such as their chambers.
Payments from the state's judicial department, which will lease the facility from a private developer, will pay interest and principal on the bonds. The payments will therefore be subject to appropriation by the General Assembly.
Neil G. Budnick, a senior vice president at MBIA, said his company takes comfort in the fact the facility will be an "essential purpose? of state government.
Gov. Lowell P. Weicker Jr., an advocate of reduced borrowing, has instructed officials in the state treasury to study "the relative costs and merits" of certificates deals, according to Mr. Cohn.
