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How to Pull Off a Massive Infrastructure Loan in 16 Easy Steps

The city wants to borrow money to build a new fire station in an underserved neighborhood, among other things. Why that’s more complicated than it sounds.

The city of San Diego wants to use a common, but convoluted financing mechanism to repair its roads and build other infrastructure. But it recently hit a legal snag. Here’s how the plan is supposed to work and why there’s a hang-up.

This is a lot in Skyline owned by the city of San Diego.

Photo by Jamie Scott Lytle

Photo by Jamie Scott Lytle

The city would like it to be a fire station someday. Right now, people who live in the neighborhood have a high risk for a delayed emergency response. A fire station would fix that.

To build the station, the city needs money. And the fire station is just one project the city wants. Right now, the city wants to build or fix $120 million worth of stuff.

But it doesn’t have that kind of money — or any money really.

2015 Budget Deficit

So to get $120 million, the city’s decided to go to people who do have money. These guys.

Image via Shutterstock

Image via Shutterstock

Wall Street’s more than happy to loan the city some cash, provided the city’s willing to pay it back with interest. The state Constitution and the City Charter, though, have rules for cities who want to borrow money. They say that two-thirds of voters have to say yes beforehand.

Photo by Sam Hodgson

Photo by Sam Hodgson

City leaders don’t want to have to go to the voters every time they want to borrow money. It could take a while and, after all, voters might say no. A workaround is to get someone else to take out a loan on the city’s behalf. In this case, city leaders are turning to their pals at the Public Facilities Financing Authority of the City of San Diego.

You probably haven’t heard of the Public Facilities Financing Authority of the City of San Diego. It has nine board members.

Board-members

Those folks might look familiar. I’ll give you a hint. Here are all nine San Diego City Council members.

Council

The Public Facilities Financing Authority of the City of San Diego is essentially a shell entity of the city of San Diego. City Council members are the members of the authority’s board.

Financing authorities don’t have to go to voters when they borrow money. So far, so good. But financing authorities do need to have something to back their loans. Here’s where things get a little complicated.

The city decides to lease properties to the authority for basically nothing. The authority can then use the properties as collateral. For this loan, there are 16 properties on the list, including these:

Photos by (from left): the Lodge at Torrey Pines; Jamie Scott Lytle; Sam Hogson

Photos by (from left): the Lodge at Torrey Pines; Jamie Scott Lytle; Sam Hogson

Then the city leases the same properties back from the authority. It pays the authority in rent an amount equal to whatever the annual bill is for the loan. That’s why this kind of loan is known as a “lease-leaseback” or “lease revenue.”

Now, the authority has the cash to make loan payments and the city gets the money it needs to build a fire station on a lot in Skyline. Here it is again:

Photo by Jamie Scott Lytle

This whole arrangement might strike you as a little weird. It struck this guy as weird.

Richard Rider

His name is Richard Rider and he’s a longtime San Diego libertarian activist. He thought this arrangement violated the state Constitution’s rules on borrowing money without a public vote. He sued in the mid-1990s when the city and San Diego’s port district tried to use this same kind of loan to expand the Convention Center. The people who work here eventually weighed in.

Photo by Steve Rhodes, via Creative Commons license

Photo by Steve Rhodes, via Creative Commons license

In a landmark 1998 ruling, the California Supreme Court said Rider was wrong.

Richard Rider X

The judges said the deal actually was a lease agreement, not simply an end-around to avoid the debt rules in the state Constitution and City Charter. They also said they realized what was going on.

Supreme Court

These days, these kinds of loans are common all over the state. State and local agencies borrowed more than $4.7 billion this way in 2013, according to state data.

The city started using these loans for infrastructure repairs in 2009. The money’s been used to do things like make over this stretch of A Street in Golden Hill, seen here in 2010 and today.

Photos by Sam Hodgson and Catherine Green

Photos by Sam Hodgson and Catherine Green

Remember, this loan is for $120 million to help build the Skyline fire station and pay for numerous other buildings and repairs. It’s the fourth loan the city has planned to use for infrastructure in recent years. And after the city got the first one, there have been no legal hitches.

Now, this guy has gotten involved.

Photo by Sam Hodgson

Photo by Sam Hodgson

He’s a lawyer named Cory Briggs. He’s sued the city a lot over the years. He’s threatened to sue over this loan. He argues the financing authority isn’t set up correctly, the city hasn’t identified a way to pay back the money and the city’s debt rules are more restrictive than the state’s. Briggs contends the loan violates the rules in the Constitution and Charter about borrowing money without a public vote.

The city isn’t happy. Here’s a section of a March 17 memo from Chief Financial Officer Mary Lewis to the City Council.

Mary Lewis Memo

So now we wait. And that means that this lot in Skyline will look like this for at least a little while longer.

Photo by Jamie Scott Lytle

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