Part 1: Thanks to Tarrant County, risky deals for projects statewide gain financing

By Yamil Berard

yberard@star-telegram.com

First of four parts

Tarrant County has quietly operated a sideline business for years: authorizing financing for billions of dollars of projects all over Texas, including risky deals others had rejected.

From Baytown to Dallas, Hondo to Brownsville, county-created corporations have issued tax-exempt bonds for senior apartments, assisted-living centers, nursing homes and other ventures. Add them up, and Tarrant ranks among the nation's top issuers of a kind of municipal bond known as private-activity conduit bonds.

But Tarrant also has another distinction known to few: It's among the nation's leaders in municipal bond defaults.

Almost a half-billion dollars of the projects have run into financial problems, some shortly after opening, a Star-Telegram examination found. In some cases, that's left disabled people in assisted-living centers that put their lives in jeopardy and low-income people in housing complexes that have fallen into disrepair. It can also leave investors holding the bag.

Bond experts question why the county has been so active in a market where the potential for abuse is high. Out-of-county projects in particular are red flags, some say.

"It's hard to imagine why Tarrant County would step out and finance something built outside of their boundaries," said Bill Blitch, a Houston financial adviser who specializes in conduit bond financing. "There must be some other attraction. Otherwise, it's not worth the time and the trouble."

The county has a quick answer on why it has been so prolific: It has built a statewide reputation for expertise. Some borrowers echo the point. "The commissioners of Tarrant County are probably the best [at these types of bonds] in the state of Texas," said Doug Sweeney of WGH Heritage, which refinanced bonds for Fort Worth assisted-living facilities.

What's more, county officials say, the nonprofit groups seeking funding have altruistic motives. So the county feels good about the deals.

"The best way to describe the purpose of these bonds is that a determination is made that they are for the public good -- that is key," County Administrator G.K. Maenius said.

Most projects, he says, have been successful, including blue-ribbon ones such as expansions of Texas Health Resources and Cook Children's Health Care System. "One cannot jump to the conclusion that a loan defaulted because it was a bad loan," he also said.

He notes that, for the county, the deals are risk-free, no cost and no sweat. Taxpayers aren't on the hook if the bonds default.

But such deals nationwide are drawing the attention of federal regulators and Congress. Among the concerns are whether they are being driven by bond attorneys and other advisers who assist in the issues.

The fees they collect can be lucrative -- and they are paid whether or not a bond defaults.

"Every time there's a [bond] closing, it's 'ka-ching,'" said Jeff Bryant, one of those involved with projects financed with conduit bonds.

And critics say investors may be lulled into thinking that such bonds are secure because they carry a government name -- in Tarrant's case, often the Tarrant County Health Facilities Development Corp. or Cultural Education Facilities Finance Corp.

Governments have been granted a huge power in being able to exempt bonds from income taxes, said Richard Lehmann, a Florida securities analyst. But the bond issues are unsupervised, he notes. "No SEC oversight, no mandatory reporting requirement, and, consequently, it's very easy to abuse," he said.

For their part, county officials say they don't know what fees are paid to the law firm that represents Tarrant as the issuer's counsel, because the borrower pays them.

The officials also say they have no responsibility for making sure projects will fly. "Ours is not a decision of any kind of the credibility or any kind of looking at the financial part of the bond issue," County Judge Glen Whitley said.

Nor were county officials aware of the bond defaults. Maenius asked the Star-Telegram for a list, although he said that there was no reason for the county to be notified of financial problems at projects for which it authorized financing.

A perfunctory role

For years, a group in Bridgeport worked to open a hospital. With seed money, it began construction in 2004, believing permanent bank financing would be coming. But by early 2005, the seed money was spent and other financing couldn't be found, a financial adviser for the hospital reported. Construction stopped with the foundation and pilings.

Delays increased the cost of the hospital, which could not get an investment-grade credit rating and was ineligible for bond insurance, the adviser noted. Then, in 2007, Tarrant came to the rescue, issuing about $59 million in unrated bonds -- considered very high-risk. Doctors' Hospital opened the next year.

That same year, a group trying to convert a former hospital in Baytown into a retirement community was also up against the wall. Harris County turned down a deal for financing. Tarrant County took it up, issuing $5.8 million in unrated bond anticipation notes.

Those were two of the issues Tarrant authorized in the first half of 2007, when its Cultural Education corporation became the third-largest issuer of municipal bonds in an eight-state Southwestern region, according to The Bond Buyer. The corporation issued $983 million in bonds in the six-month period, it reported.

Over the last four years, more than half of the $8 billion in conduit bonds issued by Texas cultural and education facilities corporations came from Tarrant County, state comptroller records show.

"It's surprising," said Tom Kelley, spokesman for the Texas attorney general, when asked by the Star-Telegram for a tally of the bonds. "There's been more than 50 of these in the last four years."

The projects are approved in public hearings held in the Fort Worth offices of Brown, Pruitt, Peterson & Wambsganss, for decades the issuer's counsel for the Cultural Education and Health Facilities corporations.

Only one member of the public has ever shown up at a hearing -- and he was looking for a job, said C. Harold Brown of the law firm. After the board vote, the issue goes to the Commissioners Court. Hearings there have become largely perfunctory, by Brown's description.

Maenius presents the project. None of the supervisors ask questions. "They used to," Brown said. But he said they have grown confident in the work of the corporations.

Whitley said the county doesn't scrutinize fees or ask questions because the bond work is completed by outside underwriters and others before deals are presented to commissioners. "I'm not sure or believe it to be our responsibility or ... to rely on us to do that," Whitley said. "That's a deal worked out between all the other entities."

Commissioner Gary Fickes also said the court's role is limited.

He recalled asking one question: "We had some [project] in some little town ... and I just said, 'Does anybody on this Commissioners Court have any clue about where this town is? And we're giving them tax-free status? ... We voted for it ... sure we did, for the public good."

After bonds are issued, commissioners may never hear of the projects again.

They weren't notified when, six months after the Bridgeport hospital opened, it had to lay off staff and draw down millions from its credit lines. In May 2009, the bonds defaulted, according to Lehmann's data. Other defaults followed.

As for the Baytown retirement home, it has yet to open. As organizers of Goose Creek Retirement Community struggled to find more funding, documents show they've avoided foreclosure because note holders signed forbearance agreements -- allowing payments to be missed for a time.

'It's a bond factory'

Unrated issues, considered speculative, haven't been the only Tarrant ones to run into problems. From 1970 to 2009, Tarrant County accounted for almost 1 in 10 defaults nationwide among municipal bonds rated by Moody's Investors Service, according to a study released this year.

By and large, municipal bonds have been considered rock-solid, and over those years only 54 rated issues defaulted, Moody's reported.

Five of the 54 carried Tarrant's name.

Those issues and others put Tarrant's defaults on the scale of large state development authorities, Lehmann said. Experts say that such a volume of defaults is so significant that it is considered a "material disclosure" that should be included in the offering statement of bond issues.

Other issues, although not in default, are troubled. They include $94 million in bonds Tarrant issued for Valley Baptist Health System in the Rio Grande Valley. The bonds' ratings were downgraded, and a rating company said a waiver from lenders forestalled defaults on some bonds.

Critics who reviewed some of the troubled deals say they were financially flimsy from the start. Some, such as the Westchester Plaza assisted-living center, involved refinancing after earlier bonds defaulted, records show.

Westchester, like some other troubled issues, also involved unrated, unsecured bonds behind the rated, insured ones. If payments are missed on those underlying bonds, investors in the rated bonds may not know and the borrower doesn't have to declare a default, said Richard Sandow, a Southlake investment adviser. And while a portion of the debt may be guaranteed, a bondholder may not know which portion he owns, Sandow said. "Investors may have thought they were buying quality but got stuck with junk," he said.

Critics also note that when Congress authorized conduit bond issues, they were envisioned as a way for governments to help stimulate their local economies and meet community needs. In many of Tarrant's deals, there is no benefit to local taxpayers or the community.

"County commissioners are grinding them out, churning them out like pancakes, like McDonald's hamburgers," Sandow said. "It's a bond factory that specializes in flaky deals."

The fees Tarrant has collected for more than a decade -- it charges $10,000 per issue now -- are not enough to be an incentive for the work, Blitch said. "I can't even imagine Tarrant County commissioners being willing to hold a special meeting for a lousy $10,000 fee," he said.

Harris County Commissioner Sylvia Garcia said she would pop out of her seat if she saw an out-of-town deal at her desk. "I'd probably watch those like a hawk," the former Houston comptroller said. "Why are they coming to us and not going to their own jurisdiction?"

Whitley said he has no problem approving such deals because local officials have a say over them.

Brown said his firm has earned a reputation with developers and top bond counsel firms. "They know that if they come to us that we're going to take care of business timely and do it correctly," he said.

Many Texas counties have not formed similar entities, so they can't issue bonds, he noted.

Brown also said there is no need to disclose to investors the number of defaults involving the corporations' bonds because they're not relevant to unrelated bonds.

As for why a number of deals have gone south, Whitley, looking at the list of defaults supplied by the Star-Telegram, said one of the larger defaults -- Fort Worth-based Osteopathic Medical Center -- was prompted by a malpractice lawsuit that caused the facility's finances to crater. The hospital closed in 2004 with $82 million in hospital revenue bonds outstanding, about $8 million of which were uninsured, The Bond Buyer reported.

Other defaults were triggered by changes in federal reimbursement for hospitals or by economic conditions, he said.

"I can't really tell why they may have really gone in default," he said. "What I would say is when these deals come to our corporation, they've already found a sophisticated investor who has said, 'We want to buy these bonds from the developer.' So it's really, they're going to be a whole lot more prepared to review those projects than anything we could do."

Fickes said that more oversight might be needed but that it may be the lender's job, not the county's. "We have no authority to do anything," he said. Still, he said, he is uncomfortable about the deals for a number of reasons. For one, nonprofits don't have any skin in the game. If a project fails, they can walk away. "When you're doing this with no money in it, with no personal guarantees, that gives you a whole new outlook on borrowing money," he said.

But Maenius is satisfied that the county is fulfilling its role well. Tarrant doesn't need to look at how projects are structured or check up on them, he said.

"Everything we bring to the court, we try to make sure it's a very sound issue. We've done our part."

Yamil Berard, 817-390-7705

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