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Hawaiian Electric Co. has been pushing state lawmakers to approve a bill this session that would authorize the issuance of $800 million in special purpose revenue bonds over the next five years.
It’s just one of several requests the Legislature is considering despite the dearth of details in how the money would be used. Renewable energy companies, a Catholic university and a former racetrack operator are seeking similar approvals.
Lawmakers are tasked with determining whether the projects would be in the public interest. It’s the first major hurdle the applicants have to pass before taking their proposals to the Department of Budget and Finance, which gives them a much more thorough vetting before deciding whether to approve them.
Despite the challenge of making the public-interest determination with scant information, the Legislature routinely approves a handful of projects each year seeking hundreds of millions of dollars in special purpose revenue bonds.
State Rep. Cynthia Thielen struggled during a hearing in February to pry more information about Hawaiian Electric’s $800 million request from Tayne Sekimura, the company’s senior vice president and chief financial officer. Details about what HECO and HEI’s two neighbor-island utilties, Maui Electric and Hawaiian Electric Light, plan to use the bond money for were hazy at best.
Thielen, a member of the House Energy and Environmental Protection Committee, said it’s a “strange situation” because of the pending $4.3 billion merger between Hawaiian Electric Industries and Florida-based NextEra Energy, which didn’t testify on the revenue bond request.
“Depending on market conditions, tax-exempt revenue bonds could be cheaper for customers than taxable debt.” — Tayne Sekimura, Hawaiian Electric Co.
She tried to find out if Hawaiian Electric’s decision to seek more special purpose revenue bonds was made before the company knew it wanted to sell to NextEra.
Sekimura said the decision to come forward with the request was made before the NextEra deal was announced Dec. 3.
“That kind of answers the question but not,” Thielen said, noting how NextEra had touted its ability to provide significantly more financial resources than Hawaiian Electric because it’s a bigger company.
From a financing standpoint, Sekimura said, Hawaiian Electric is always looking at what vehicles are available to the company. Plus, the deal may not be approved by the Public Utilities Commission, she said.
The Legislature has authorized the issuance of special purpose revenue bonds for Hawaiian Electric nine times in the past. Sometimes the company takes advantage of them, sometimes not.
“Depending on market conditions, tax-exempt revenue bonds could be cheaper for customers than taxable debt,” Sekimura said. “In 2012 and 2013, capital market conditions made it more economical for the companies to issue taxable debt than revenue bonds. However, the companies would like the flexibility to issue revenue bonds if it again becomes more economical to do so for our customers.”
The proceeds of the sale of the bonds will be used by the utilities “for the construction of facilities necessary to furnish electricity,” she said. The legislation also includes language to allow the companies to use the money to acquire land.
When Thielen asked what land the companies planned to purchase, Sekimura said “that’s just a general type statement.” She was unable to offer much in the way of specifics aside from saying it was probably for easements and grid modernization.
“The advantage for the project party is they can receive financing generally at a lower rate because it’s based on tax-exempt borrowing.” — Wes Machida, state finance director
Investors assume the risk when it comes to special purpose revenue bonds whereas general obligation bonds are backed by taxpayers, state Budget Director Wes Machida explained in a recent interview.
“The advantage for the project party is they can receive financing generally at a lower rate because it’s based on tax-exempt borrowing,” he said.
The Department of Budget and Finance acts as a conduit insurer but doesn’t pledge any credit or funds, said Scott Kami, who handles bond issues for the state as the Financial Administration Division administrator,
He added that the issuance of the bonds is based purely on the credit strength of the project party.
The bonds are generally authorized for a five-year period but the Legislature can approve an extension.
Honolulu Seawater Air Conditioning is asking for another five years for its bonds. Over the past several sessions, the Legislature has approved a total of $145 million in special purpose revenue bonds for the project, which involves a technology that uses cold seawater from deep in the ocean to cool buildings.
There are $48 million of bonds approved in 2010 that are set to expire June 28. The company wants to keep that funding source available.
“Previous unprecedented disruptions in the financial markets and longer-than-expected permitting and regulatory reviews caused HSWAC to postpone the earlier sale of SPRBs,” Eric Masutomi, the company’s CEO and president, told lawmakers who considered the bond bill last month.
“Current markets have improved and there is now suitable interest in financing this renewable energy project,” he said.
The company, whose majority owner is now the social investment firm Ulupono Initiative, now expects to break ground later this year and use all the bond money within the next three years.
Honolulu Seawater Air Conditioning isn’t the only renewable energy company seeking special purpose revenue bonds.
Anaergia wants $90 million in the bonds to develop facilities for renewable non-fossil fuel production on the Valley Isle.
Maui Mayor Alan Arakawa said the county has contracted with the company to create the Maui Resource Recovery Facility and Energy Park Project.
“Through the use of special purpose revenue bonds as a means of funding these projects, Anaergia should be able to provide the above-mentioned benefits with no investment or operational financial risk to the State or County,” he said.
Kurt Bossert, Anaergia director of business development, said the bonds will be sold to private investors and will not be backed by the state or county.
There are similar bills moving forward for renewable energy projects proposed by SunStrong, which wants $100 million in special purpose revenue bonds for a solar farm; Pelatron Q, which is seeking $44 million to build a waste-to-energy power plant on Kauai; and Waimea Nui Community Development Corporation, which is asking for $45 million for planning, acquisition and construction of agriculture, renewable energy and educational facilities.
While most of the requests for special purpose revenue bond authorizations have easily cleared their legislative hurdles, two have faced a certain degree of public opposition.
Chaminade University of Honolulu is seeking $25 million to help the private sectarian school finance improvements to its athletic facilities, classrooms and offices as well as other needs.
Michael Golojuch, chair of the Gay, Lesbian, Bisexual and Transgender Caucus of the Hawaii Democratic Party, has fought the bill because he believes the bonds should go to public schools not a Catholic university.
Chaminade officials told lawmakers that 2,500 students are enrolled there, many of whom are on financial aid.
“Selling SPRBs is a way for the State to loan funds (for private business projects that are found to be in the public interest by the Legislature) without actually having to spend taxpayers’ money.” — Legislative Reference Bureau report
The Legislative Reference Bureau has studied the issue of using special purpose revenue bonds for private schools. Its 2001 report to the Legislature says these bonds won’t take money directly away from public schools because investors provide the money that is actually loaned to the private business.
“Selling SPRBs is a way for the State to loan funds (for private business projects that are found to be in the public interest by the Legislature) without actually having to spend taxpayers’ money,” the report says.
“It is important to stress that the purchase of private school SPRBs would result in a loss of state income tax revenues only when these bonds are purchased by Hawaii taxpayers,” the report says. “The purchase of private school SPRBs by out-of-state investors would not result in the loss of state income tax revenues (for Hawaii) unless these out-of-state investors also paid Hawaii state income taxes.”
The Senate version of the bond bill died but the House passed its draft earlier this month, sending the measure back to the Senate for its consideration.
The effort to build a motor sports center, including a racetrack and educational facilities, has resurfaced again this session.
Two bills asking for $360 million in special purpose revenue bonds for several Paradise nonprofits involving George Grace III have died, but the House has passed a separate measure seeking an unspecified amount of money. It now awaits committee hearings in the Senate.
Paradise Ohana Centers managing member Rodney Sato says the “Automotive Technologies Center will dazzle and excite anyone.”
But the Attorney General’s office has testified in opposition, questioning whether the project falls under the scope of an “industrial enterprise.”
Grace has hired a major law firm to help push the bill through the Legislature. Alston, Hunt, Floyd & Ing testified that the bonds can be used for the project based on a broadly construed definition of “industrial.”
The project’s biggest barrier may not be the idea of building a new raceway or even using special purpose revenue bonds. The concern has been over Grace, who owes Honolulu hundreds of thousands of dollars in fines for failing to get city permits to improve 38 acres of Department of Hawaiian Home Lands property five years ago for Kalaeloa Raceway Park. DHHL eventually evicted him and the racing there has stopped.
The Kapolei/Makakilo Neighborhood Board has debated building a motorsports facility in the area. The board has said it does not oppose a racetrack but does oppose the process by which the bill to provide the special purpose revenue bonds has been run.
The House Finance Committee only provided 48 minutes notice for its March 5 hearing on House Bill 1329. The board said this limited the public’s ability to testify and pointed out that even the Attorney General’s office lacked time to comment on the bill as it had when it was before the Economic Development Committee in February.
The bill, introduced by House Speaker Joe Souki, initially sought $100 million in special purpose revenue bonds for four different Paradise nonprofits that would do their projects on a portion of more than 400 acres in West Oahu. It’s still unclear exactly where the projects would be located.
The Finance Committee blanked out the dollar amounts before the bill passed the full House earlier this month. That means if the Senate puts the numbers back in and passes it, the two chambers will have to work out the differences between the two versions later this session in conference committee.
The state has $1.28 billion in special purpose revenue bonds issued and outstanding as of July 1, the start of the 2015 fiscal year, according to the budget office.
More than half of that total has gone to not-for-profit health care facilities, including The Queen’s Health Systems and Hawaii Pacific Health Systems.
Utilities comprise the next highest category, with $473.4 million in bonds for HECO, HELCO and MECO.
The Wailuku River Hydroelectric Power Co. is the only industrial enterprise, receiving $9.8 million in special purpose revenue bonds.
And four schools account for the remainder of special purpose revenue bonds that have been issued. Chaminade University, Hawaii Pacific University, Mid-Pacific Institute and Montessori School of Maui together got $69.1 million in bonds.
But more than $1.47 billion in special purpose revenue bonds have been authorized by the Legislature but not issued as of July 1.
This includes bonds for nine health care facilities, one utility, eight industrial enterprises, one processing enterprise and six schools.
Budget officials said many of the projects are novel and appear to have a good public purpose but lack credit worthiness and a strong revenue stream.
The state won’t lose out on anything directly because the investors and companies assume the risk. But the state’s name is still attached — signaling to investors that the application has been reviewed and approved by the Budget and Finance Department. So while taxpayers won’t be out any money directly by having to bail out a company that can’t make its debt payments, it still doesn’t look good for the state since it essentially signed off on the project.
A complete breakdown of what projects have been authorized and are either outstanding or unissued is available on the Budget and Finance Department’s website here.
* Disclosure: The Ulupono Initiative was founded by Pierre and Pam Omidyar. Pierre Omidyar is the CEO and publisher of Civil Beat.