Four months have passed since Brevard County, Fla., voters decided by a narrow margin to continue lease payments on a $24 million certificates of participation issue sold to fund a controversial government center.
But in this east Florida county and throughout the Sunshine State -- the great COPs controversy of 1993 has not been forgotten.
"This has been by far the most divisive issue here in the past 10 years, and the ill feeling it's created, I'm afraid, will remain with us for a long time," said Karen Andreas, chairman of the Board of County Commissioners. "We have resolved not to sell any more COPs, period, not even for equipment leases."
Brevard County's resolve to avert further COPs sales has taken concrete form, first in a pledge by the county commissioners in May not to approve any more COPs.
And last month, the commissioners passed an ordinance formally revoking previous authorization by the county "to issue ... certificates of participation or other obligations representing an interest in the county's payment obligation under such lease purchase programs."
Andreas comments, and the commissioners' actions, sum up the feelings of many in the county. They say that the 1989 COPs issue, which was used to build a government operations center in Viera, should never have been sold without voter approval, as is required of general obligation debt in Florida.
If a referendum had been held four years ago, Andreas maintains, voters would likely have rejected the COPs. given the cost of the operations center, its distance from citizens in the northern part of the county, and the fact that the center displaces government workers at other locations.
The commission chairman also objects to what she characterizes as the "inherent contradictions" of COPs issues.
Because COPs issuers retain the right to cease yearly lease appropriations, Andreas points out, they can avoid the referendum requirement imposed on borrowers that offer traditional long-term debt. But this legal definition of COPs, she says, is at odds with the marketplace reality of these instruments, in which investors expect the lease to be honored over the longterm.
~Kind of Crazy'
"I've come to the conclusion that because of these contradictions, and because of all the muscle used by the financial community to get us to continue the lease, governments have to be kind of crazy to get into these things," Andreas said. "They seem to offer so much flexibility, but are really just as binding and constricting as any other debt."
Brevard County's desire to avoid COPs sales is shared by its representatives in the state legislature.
David Teak, an aide to state Rep. Charlie Roberts, D-Titusville, says Roberts and state Sen. Patricia Grogan, D-Merritt Island, will push again next year for a bill they proposed in the 1993 legislative term that would severely limit the issuance of COPs.
"Both Rep. Roberts and Sen. Grogan feel this is a very important issue because it goes to the heart of citizen participation in government," Teak said.
The identical bills filed by Roberts and Grogan, which called for local governments to submit to voters any proposed lease financing over $2 million, both failed to move forward.
"Before the Brevard vote, opponents of the legislation pretty much hunkered down and the bills gained steam. But after March 16, they started kicking back in and the bills got nowhere," said Teak. "Next year, we will take another whack at it. But this time we will develop a broad coalition of support among taxpayer groups."
The legislation expected to be submitted next year would probably raise the ceiling on lease financings that could be done without a referendum to $10 million from the $2 million in the Roberts and Grogan bills, Teak said. It also would retain features of the 1993 proposal, he said, including a requirement that before selling a lease deal local governments conduct a public hearing and provide a disclosure statement of anticipated costs.
For many local governments in Florida, Brevard County's experience served only to intensify their existing aversion to using COPs, at least for property acquisition.
"We have never done a COPs deal, and I don't think we ever will," said Harry Hedges, auditor for the Board of County Commissioners in Polk County, Fla.
"Our philosophy is that you should not try to get around the constitution of Florida, which says you must have a referendum on long-term debt," Hedges said. "The situation in Brevard only makes that philosophy seem more valid."
Hedges said that Ray Jackson, the county's administrator, refused to consider COPs for a $35 million jail when presented with the proposal from investment bankers, even after voters last fall rejected a proposed optional one-cent increase in the sales tax to help pay for the jail and other facilities.
Linda Chapin, county chairman in Orange County, expressed similar feelings.
"I never felt it was a particularly good idea to use COPs for land deals, and the board would be extremely reluctant to use them because of the perception, which is particularly strong now after the events in Brevard County, that they are an end run around voters," Chapin said.
The widespread wariness toward COPs in Florida is borne out in a recent nationwide survey of local government officials' attitudes about lease revenue debt in the aftermath of the Brevard County referendum.
The survey, conducted by the Government Finance Officers' Association and the Municipal Bond Investors Assurance Corp., finds Floridians to be more skeptical about COPs than people in other parts of the country.
According to the survey, 37% of Floridians said the Brevard COPs controversy has negatively affected their lease issuance plans, compared to 21 % nationally.
Eighty-three percent of the Florida respondents said they felt the costs of issuing COPs would be higher, 81% said the marketability of COPs would be hindered, and 69% said issuers would seek alternative financing options in lieu of COPs. This compares with an overall national response to these questions of 74%, 59%, and 50%, respectively.
So far this year, only four COPs deals totaling $200.9 million have been sold by issuers in Florida, according to Securities Data Corp. Three of the four issues were refunding deals, and all were sold by school districts.
The volume of COPs for the first half of 1993 compares with full-year volume of $437.5 million in 1992 and $596.0 million in 1991, according to Securities Data.
"Deals take about six months in the pipeline. And the worries about Brevard County, which began last fall, definitely cut into that pipeline," said Tom Holley, financial adviser to Brevard County.
Testing the Waters
"My guess is that you could see limited issuance of COPs in Florida for some time as local governments slowly test the waters," said Holley, who is president of Government Financial Advisors, a Winter Park, Fla.-based financial advisory firm.
The deepened reluctance of many Florida issuers to consider COPs in 1993 comes three years after the Florida Supreme Court upheld a lower court ruling that municipalities have the right to enter into annual appropriation lease financings for real property.
Following the 1990 ruling, some analysts predicted that, given Florida's financing needs and the tendency of its citizens to reject referendums on general obligation bond issues, yearly COPs volume in Florida could soon exceed $2 billion.
Yet despite the chilling effect of the Brevard County referendum, market participants say that the government units in Florida that have made the most frequent use of COPs since 1990 -- the school districts -- are not likely to change their habits.
Since the referendum, three county school boards in Florida have issued a total of almost $112 million of COPs to take advantage of lower interest rates: Hernando County with $11.4 million in April, Dade County with $53.3 million in May, and Polk County with $47.2 million in June, according to Securities Data.
Just three weeks before the Brevard referendum. the Lee County School Board sold $88.9 million of COPs to fund a new elementary, middle, and high school.
As Danny Wheelock, the Polk County School Board's director of finance, sees it, COPs, will continue to be a necessary tool for school districts because of the reluctance of Floridians to approve general obligation bonds. Under the state constitution, all GOs sold by local governments must be approved by voters.
In the case of Polk County School Board, the defeat of a $1 00 million GO bond referendum in 1988 created a crisis that led to issuance of COPs beginning in 1988, Wheelock said. The issuance, he said, picked up steam after Florida's high court ruling in 1990.
"We have 70,000 students in the county, and with an increase of 2% to 3% a year, you are looking at a couple of new schools a year," Wheelock said. "The funding has to come from somewhere."
Wheelock said the school board plans to issue about $25 million of COPs next fall to build a high school and also anticipates issuing between $10 million and $15 million of COPs by the end of 1995 for a middle school.
He said the political risk that was present in Brevard County with the government center COPs issue is not present for the school districts' lease financings.
"First of all, a number of schools are wrapped in under a master lease," he said. "There is just no possibility, as I see it, that we would want to walk away from these facilities."
The municipal market itself also seems to be willing to move on from Brevard.
"There was definitely an impact on the Florida market for COPs beginning this past fall and continuing until the referendum." said one trader, noting that no COPs were sold in Florida between October 1992, when Pompano Beach sold $7.7 million COPs, and the Lee County School Board issue in February.
"But since the referendum, I have not seen any resistance to these deals, either in terms of the sales of new issues or secondary market trading," the trader said.
At Municipal Dond Assurance Corp., which inherited the $24 million Brevard County COPs issue when it bought Bond Investors Guaranty in 1989, Neil Budnick, a senior president, said the firm would continue to back Florida credits.
Budnick noted that MBIA insured the largest COPs deal sold in Florida since the referendum, a $53.3 million refunding deal in May.
"We haven't changed our criteria, which will continue to put a good deal of emphasis on the essentiality of the project being funded," Budnick said. "With financing needs what they are in Florida, I think there could eventually be a lot of business there for us in the COPs area."