Municipal leasing is now thriving in Missouri, after being held down by controversy and a politician's attempts to stamp it out as a fraudulent and deceptive junk bond financing technique.
Lease offerings may well reach a new high in the state this year. The $314 million of lease revenue bonds and certificates of participation sold so far in 1991 by the state and its local jurisdictions already is the most such offerings in five years, and within shooting distance of the record $445 million lease deals set in 1986, according to Securities Data Co./Bond Buyer.
As a percentage of total state bond offerings, leasing -- at 18.5% so far in 1991 -- is also making a comeback and approaching the state's 1986 record,, when a quarter of all public deals were structured as leases. Missouri's renewed reliance on leasing compares with the national average of about 10% of bond deals backed by leases nationwide.
Kansas City is eyeing what could become not only the largest lease deal in the state but the biggest lease deal ever in the nation -- a $1.5 billion leashold revenue bond offering to help Douglas Aircraft Co. finance a new jumbo jet construction plant.
City officials are offering the company the unusual conduit lease financing -- which would be taxable, since the bonds would be secured by the company's lease payments -- as an inducement to locate its plant in Kansas City.
Inherently Deceptive?
But while the Missour leasing business is bustling now, it was not always so robust. Only a short while ago, the state's leasing industry was struggling against charges that the technique was inherently deceptive and was being used to avoid raising taxes and get around the state constitution's requirement of a four-sevenths vote of approval for state and local general obligation bonds.
Leading the charge with legislation that would have stifled any further state leasehold revenue bonds was Sen. Roger Wilson, chairman of the Senate Appropriations Committee in the Democrat-controlled Assembly.
Sen. Wilson -- who steered his bill successfully through the Senate for three years straight before abandoning efforts this spring -- said he was concerned about the growing use of the technique to finance major state building projects, including two prisons and the legislature's own Harry S. Truman office building.
"Our constitution indicates that any time we borrow large amounts, we should go to the people," Sen. Wilson said in pushing for the bill. "But 25 years ago, we developed this ingenious way to use revenue bonds on projects that didn't produce any revenue. Recently, it's gotten out of hand. We're building buildings all over the place and committing ourselves to debt when we don't have guts to go out and get a tax increase."
Sen. Wilson said it was tantamount to selling "junk bonds" to issue "revenue bonds" not backed by a dedicated revenue stream, but by only a promise that the legislature would appropriate lease payments each year.
He was particularly appalled that Gov. John Ashcroft, a Republican, had been promoting lease-backed bonds that financed the construction of university classrooms as "college savings bonds."
Led by Sen. Wilson, the Assembly forced Gov. Ashcroft in 1989 to cancel plans to issue $40 million of state lease-backed bonds. The number of lease deals that year dropped to a low of $121.9 million or 7% of total state offerings.
The growing use of lease-backed certificates of participation by local governments to finance schools also came under attack from taxpayer groups and legislators. A bill sponsored by state Rep. Larry Rohrbach last year would have required the same four-sevenths margin of approval for local lease contracts as for GOs if used to finance the purchase of real property.
Rep. Rohrbach said he had hopes of "piggybacking" his bill onto Sen. Wilson's measure. After his success in 1989 at putting a lid on state lease offerings, Sen. Wilson was brimming with confidence and had claimed to have enough support in the House to get his bill passed.
But the legislator's efforts were thwarted by a powerful leasing defender in the House -- Speaker Robert Griffin -- who maintained that the legislation would have "tied the hands" of state and local governments. By erecting procedural obstacles. Rep. Griffin prevented the Wilson bill from getting to the House floor for a vote each time it passed the Senate.
The legislation also was overwhelmed by what appeared to be a groundswell of support in the Assembly for the continued use of leasing as a convenient financial tool. That support was seen in the Assembly's repeated, albeit hotly debated, votes to go forward with each step of the state's long-planned lease financing for the $250 million St. Louis stadium and convention center.
Sen. Wilson's bill initially would have killed the financing for the highly popular stadium project. But he bowed last year to political pressures and explicitly exempted it from the legislation. The issue finally made it to market last month.
Leasing proponents said the Assembly's last vote this spring on the stadium project showed not only the popularity of the project but a strong endorsement of the leasing concept.
In approving the state's first $4.5 million lease payment for the deal, the Assembly turned aside strong lobbying by the Rev. Larry Rice and other advocates for the homeless, who argued that the lease deal was consummated without the consent of voters and that social service spending should take precedence over the lease payments.
While House members were sympathetic, they nevertheless reversed an initial vote against the lease appropriation and it later sailed through the full Assembly. Rev. Rice vowed to continue the battle.
"We're going to fight them every year for the next 30 years," he said. "I'm not going to stand back and watch while homeless kids are roaming the streets and people's utilities are being cut off and just let them take the payments out of the general revenue fund," he said.
"They may be able to get an appropriation this year, and maybe next year, but at some point, you're going to have a taxpayer revolt and an appropriation will not be made and the bonds won't be worth the paper they're printed on," he said. "Pity the poor guy that's holding the bonds," he added. "It's like bait the spiders have put out for the insects."
Momentum in Legislature
But leasing proponents said the legislature was not likely to change its mind again after the hard-won vote in favor of the lease payment, which showed that it was committed to the stadium project despite a clear airing of the opposition.
"It put the issue to rest. The legislature wasn't hoodwinked. They really knew what they were doing. It was fully discussed, and they recognized the consequences," said William Darmstaedter, public finance manager at the Boatmen's National Bank of St. Louis and financial adviser on the project.
With momentum building in the legislature for the continued use of lease financing, even stalwart backers of the Wilson bill conceded defeat when it died once again in May as the Assembly adjourned for the year, without gaining a vote in the House.
"When it's been shot down that many times, after a while you just move on to other things, other issues. Retreads are not popular with the legislature," said Bob Kanuth of Taxpayers Research Institute of Missouri, an antitax group that supported both Sen. Wilson's and Rep. Rohrbach's legislation.
The opposition went beyond the procedural obstacles posed by House Speaker Griffin, he said. "There was not much enthusiasm for the bill in the House. Legislators really like this sort of thing. They can go out and build all kinds of office buildings, convention centers, and jails without having to do their homework and go to the electorate," he said.
The bill's fate proves that "there may be no legislative way of preventing" lease financings in Missouri, he added.
Janice Gentile, an aide to Sen. Wilson, said he has no plans to introduce the bill again because he believes it is no longer "necessary."
"There was enough of a public outcry against funding the stadium this year, with heavy media coverage, that it has cast gloom over that kind of project" and will stifle such state lease financings in the future, she said.
Ms. Gentile maintained that the controversy over the stadium funding "changed the mind-set in Missouri" about the lease revenue bonds. "I think we've come to the conclusion that revenue bonds will be issued in the futureonly for revenue-generating projects," she said.
But Mr. Kanuth, and several of the state's bond dealers, reported that leasing is still "very much alive and kicking" within the state. In fact, as part of a legislative deal to enact an education finance bill this year, Mr. Kanuth said the Assembly authorized the issuance of about $35 million a year of lease-backed revenue bonds for the operation and maintenance of university buildings.
"There's still a lot of lease revenue bonding going on. Quite frankly, the next time the state needs to build a mental institution [or other large facility], I expect they will use it," he said.
