DALLAS - When the Harris County improvement District No.1 sells $11 million of bonds today to pay for cosmetic projects around the upscale Galleria shopping center, no one will be happier than officials in the county seat of Houston.
With the city's budget stretched to pay for police and big-ticket capital improvements, Houston officials have endorsed the improvement district's bond plan as an innovative way to pay for projects that voters citywide would almost surely reject.
The competitive financing marks the first time a specialized district in Texas has sold long-term debt for infrastructure projects, rather than seeking funding from an overlapping government, such as a city or county.
Bond experts say that with local finances tight everywhere, this will not be the last sale by an improvement district in Texas. "I think this is a forerunner of things to come," said Gene Shepherd, managing director at Legg Mason, Wood Walker Inc. in Houston, the district's financial adviser.
Apart from the question of Houston's financial flexibility, the issue is one of pragmatic politics. The Harris County Improvement District plans to build arches spanning the street, put in mini-parks, and install stainless steel lights. Houston's politicians would not be likely to propose such spending and, in any case, the city's taxpayers would be unlikely to approve it.
"We are doing things I don't think a city could justify," said John Breeding, manager of the improvement district, which includes the Galleria shopping center and neighboring office buildings. "In today's economic environment, the city of Houston could not undertake a project like this."
Even though the issue is the first by the district, created in 1987 by the Texas Legislature, it has won medium-grade ratings, and the district may secure credit enhancement - both unusual for a firsttime issuer. Whether bond insurance is used will be the winning bidder's option.
Harris County Improvement District No.1 is not typical. Because the 325-acre district is anchored by the Galleria and full office buildings that employ nearly 80,000 workers, it has a stable tax base of nearly $1.5 billion. Also, the commercial property owners in the area sit on the district's board and have backed the projects.
Citing the large but heavily concentrated commercial tax base, Moody's Investor's Service gave the district's offering an A rating, while Standard & Poor's Corp. assigned an A-minus.
"There's an expectation that the [property] values will rise," said Robert Durante, managing director at Standard & Poor's. "Growth is not necessary in order for the debt to be paid off."
District officials expect a property tax levy of 10 cents per $100 of assessed valuation, with half that paying for operations and the remainder for debt service. While property values in the district have been rebounding with the Houston economy, the district could get a boost if nearby tracts valued at $250 million are successfully annexed by next year.
Analysts say that another factor in assigning the medium grade rating was the fact that the time it will take to retire the serial bonds - they have a final maturity of 2019 - exceeds the life of the projects being funded. But district officials defend the long-term pay-back, saying it enables them to keep the tax rate low.
Shepherd expects the bonds to be sold to institutional investors because the sale is the first of its kind.
The district last May was given authorization to issue up to $125 million of general obligation bonds in a referendum in which only four residents of the sparsely populated district unanimously approved the sale. Only about 20 people live there.
Even though the district has a substantial bond authorization, officials say they have no plans to issue more than the $11 million being sold today. The bonds were originally to have been sold last summer, but lawyers decided to seek a validation ruling from a Texas judge because it marked the first time that such an issuer in Texas had sold debt.
Already, three similar improvement districts have been formed in Houston and there is at least one in Dallas, Austin, Corpus Christi, and San Antonio.
Bob Randolph, a partner at Vinson & Elkins in Houston the district's bond counsel, said an improvement district allows parts of an urban area to address needs that might be ignored by other taxing jurisdictions. Randolph is the developer of the improvement district concept.
Randolph said an improvement district is also able to use tax dollars to address specific needs. For instance, an improvement district in the Greenspoint area of Houston has used tax assessments to improve security. As a result, he said, the rate of reported crimes has declined 25% over the past year.
In the case of the Galleria area, he said, the bond-financed projects are necessary "in order for the area to remain competitive" in attracting shoppers to the stores and companies to the office complex.
While some have compared improvement district bond issues to tax increment financings, Randolph said there are several key differences. Tax increment districts must include blighted areas and they are funded by taking revenue growth from other taxing jurisdictions such as schools.
Improvement districts, meanwhile, can encompass any region and are funded by a dedicated tax. "The money is not coming out of the coffers of those entities," Randolph said.
