NMFA: $1.2M Lost in Interest

The board of regents at New Mexico Tech decided last year the school needed another dormitory to meet growing student demand.

To pay for the dorm, Tech could have borrowed the money from the New Mexico Finance Authority, which would have sold bonds to finance the loan. Instead, the school’s regents decided to have Tech issue its own bonds totaling $13.4 million.

That decision cost Tech $1.2 million — maybe much more than that — in extra interest, according to analyses by the Finance Authority.

The school is paying an interest rate of 4.27 percent on the bonds it sold Aug. 5, 2011. The authority says that because it has higher credit ratings than Tech, it could have sold bonds on that same day at an interest rate of 3.62 percent. The Finance Authority actually sold bonds just six days after Tech and got an interest rate of 2.6 percent.

Tech was certainly well aware of NMFA.

Lonnie Marquez, vice president for finance and administration at Tech, is a longtime member of the Finance Authority board. Tech’s financial adviser on the bonds was Mark Valenzuela of investment banking company George K. Baum & Co., who used to be director of governmental affairs for NMFA.

Valenzuela accused the Finance Authority of manipulation in its review of the Tech bond deal, adding, “They fool people with this type of analysis all the time.”

If Tech had gone with NMFA, it would have had to place 10 percent of the borrowed amount, or $1.3 million, in a debt service reserve fund to protect bondholders, he said.

That’s true, said Michael Zavelle, chief financial strategist at the Finance Authority. But Zavelle said the $1.3 million, with interest, would have been returned to Tech after the NMFA bonds were paid off in 20 years or sooner or the money could have used by the school to make its last loan payment.

The Tech deal is important because the value of NMFA to state and local governments and agencies has become an issue in the debate over the authority’s future. That debate began last month with the discovery that its former controller had forged its 2011 audit. NMFA’s chief operating officer also has been arrested on charges of misleading investors about the authority’s finances.

Through its key program, the Public Project Revolving Fund, the Finance Authority borrows money through bond sales, loans the money to governments and agencies for capital projects like construction and equipment, then pays off the bonds with loan payments.

Governments and agencies aren’t required by law to borrow through NMFA, and the authority actually does only about one-tenth of all government bond sales in New Mexico.

Zavelle last year examined 33 other bond sales by local governments, public school districts and other entities, including Tech. He compared the terms of the bond sales to the terms the Finance Authority could have gotten for bond sales on the same days.

Zavelle said NMFA conducts such studies from time to time as a check on the effectiveness of the Finance Authority.

Of course, it would be in NMFA’s self-interest to skew such analyses in favor of the Finance Authority, but the data released by Zavelle show mixed results, with some government entities actually getting better financing deals than the authority could have obtained.

Also, Zavelle said, there are legitimate reasons why an entity could choose to issue its own bonds. It may have credit ratings close to those of NMFA; it may want to better time its borrowing with when the funds are needed; it may want greater flexibility for possible future refinancing.

According to the analyses by Zavelle, five government entities got better financing deals than NMFA could have gotten, but the savings were significant in only one case, a $9.5 million bond sale by Roswell Independent School District.

Some governments and agencies would have saved little through NMFA bond sales, but several would have benefitted significantly, with Tech at the top of the list at $1.2 million.

Tech will pay $21.2 million in principal and interest to pay off its bonds. NMFA estimates it would have paid $20 million in principal and interest if it had issued the bonds.

UpFront is a daily front-page news and opinion column. Comment directly to Thom Cole at tcole@abqjournal.com or 505-992-6280 in Santa Fe. Go to ABQjournal.com/letters/new to submit a letter to the editor.
— This article appeared on page A1 of the Albuquerque Journal