Goleta Municipal Bonds to Fund Bike and Pedestrian Pathway Under Hwy. 101, Repairs Along Cathedral Oaks Road

Tax-Free Bonds Are Intended to Raise About $37 Million to Cover Project Costs

By Jean Yamamura Fri Dec 06, 2024 | 03:40pm

A bulge that appears in a wall is never a good thing, but when the wall supports a street, it can be real trouble. Goleta found itself in a fix when the lattice-like crib wall under Cathedral Oaks Road developed not only a bulge but also hollow voids in the earth beneath the road. The city closed Cathedral Oaks near Winchester, planning to make repairs after the winter storms died down. That was in 2017.

Having exhausted every grant and emergency funding avenue, Goleta is now planning to issue its first pair of municipal bonds to pay for the support-wall repairs. These tax-free bonds will pay for not only that project but also a $50 million bike and pedestrian pathway that will connect the two halves of the city split by Highway 101. The bonds are intended to raise about $37 million.

The pathway is mostly funded, but $19.2 million remains unfunded. The bonds have been considered for at least a year, but now the pathway’s major grant, worth $18 million, requires construction or bidding to start next year. The new path would connect the city center of the 1800s — Old Town — with the newer shops and schools on the north side of the highway for residents and students, and vice versa for north-side residents headed for Goleta Beach or UC Santa Barbara.

The bike and pedestrian way was first proposed in 1993, observed Councilmember James Kyriaco during the council meeting on Tuesday: “The original cost was $2 million, and it’s just getting more and more expensive to build.” Every year since 2021 construction costs have gone up more than 9 percent, Kyriaco said. By comparison, the city would pay interest of less than 4.5 percent to repay the bonds.

Underlining the need to keep Goleta in the good books of grant agencies, James Kyriaco spoke on Wednesday of other city projects gone waiting almost as long as the San Jose Creek path, like the bridge over the 101 for the stretch between Storke and Winchester. “As a pedestrian and bicycle bridge,” said Kyriaco, “it’s a really good candidate for grant funding. Safe Routes to School, pedestrian safety, bicycle safety — those are things that are really attractive to grant funders.”

Goleta is now planning to issue its first pair of municipal bonds to pay for crib-wall repairs along Cathedral Oaks Road. | Credit: City of Goleta

On Cathedral Oaks, the road is open, but the bike path remains fenced off. Mayor Paula Perotte, who lives out in Winchester, noted how many students and bicyclists once used the bike path, as well as the looming potential for one of the city’s main arterials to close. As Councilmember Stuart Kasdin put it, “We can’t be living in fear every time it rains: ‘Will the road collapse?’“

As the city sought funds, federal emergency grantmakers provided one small grant for a sinkhole, but they deemed the majority of the problem to be one of inadequate maintenance. The repair is estimated to cost about $18 million, of which $15.5 million will be funded through the bonds.

What’s a GFFA?

One of the things that has raised citizen hackles over the bond strategy is the formation of the Goleta Facilities Financing Authority, or GFFA, which is the entity that can create bonds. Newly constituted on Tuesday night, the GFFA’s board of directors is made up of Goleta’s sitting councilmembers. The proposal is that after a successful February sale of the bonds, a lump sum of the proceeds — hopefully somewhere close to the $35 million project costs — will go to the city.

A bond-creation mechanism like the GFFA is ripe for corruption, warned Karen Lovelace in an email to the council. Lovelace is a longtime Goleta resident, whom the slate of candidates who ran against the incumbents in November’s election had credited with suggesting that they run. She referenced problems in other locales from a lack of oversight of similar “vertical joint powers agreements.” She argued the city would be selling bonds for “boutique construction projects” when the problem lay with its poor spending choices. “Don’t lead our city down this murky path. Find another way!” Lovelace wrote.

Luke Rioux, Goleta finance director | Credit: City of Goleta

In the clear light of Wednesday morning, the city’s finance director, Luke Rioux, gave further details about the GFFA. Its directors were the elected officials for the city — and equally accountable to voters. Added to that is the transparency demanded by the Brown Act, public hearings, and timely audits, plus the oversight of the California Debt and Investment Advisory Commission and the federal Municipal Securities Rulemaking Board. These last two agencies looked for “red flags” such as an audit that is late, Rioux said.

“By law, we have to file annual financial transactions reports. We have state controller reports that we have to file. And the state does launch audits on any city they deem to have irregular activities,” he said. About the City of Bell, an infamous corruption case Lovelace had raised, Rioux said, “They were spending their proceeds not on what they said they were spending them on — salaries and what not.”

Where the long life of the bonds and the GFFA’s ability to issue new bonds are concerned, Rioux said Goleta has a debt management policy that only allows new debt if new revenue is identified or the council cuts the budget to create capacity. The city requires a balanced budget and, as a hedge against recession, keeps in its reserves about a third of its estimated general fund amount, which is an adopted city policy.

Why Not Go to the Voters?

Tuesday night’s dialogue made it clear that Lovelace was not alone in asking councilmembers questions about the bonds. Such as, why didn’t Goleta choose a ballot measure? After all, with the exception of Proposition 5 for affordable housing, November’s election saw all the bed tax, sales tax, and school bond measures pass in Santa Barbara County.

Wing-See Fox, municipal finance advisor for Goleta | Credit: City of Goleta

Wing-See Fox, the managing director for Urban Futures Inc., is serving as the city’s municipal finance advisor. (Other professionals hired by the city for the bonds are Sara Oberlies Brown, managing director of Stifel, Nicolaus & Company, the underwriter; Vanessa Legbandt, partner, Stradling, Yocca, Carlson, & Rauth, bond counsel; and Kevin Hale, of counsel with Orrick Herrington & Sutcliffe, disclosure counsel.) Fox explained that bond measures that require a vote are debts that are paid through an increase to property taxes. The municipal bond route, on the other hand, “This one lives within your budget,” she told the council.

For instance, one of the bonds is a sales tax bond backed by the annual Measure A money Goleta receives. The city’s share of Measure A — the County of Santa Barbara’s half-cent transportation tax from 2008 — is about $2.3 million every year. The city proposes to use about $1.5 million of that annually to pay down the sales tax bond. But only so much money could be raised this way because Measure A’s money stream ends in 15 years. The remainder comes from a second bond — a “ground-lease revenue bond” that uses City Hall as collateral — for which Goleta will pay about $1.13 million from general fund dollars annually.

Municipal Bonds 101

As explained in the staff report, the ground-lease revenue bond is by far the most interesting. It reads like something from The Onion, if The Onion were interested in bond debt.

The story begins in 2019, when Goleta purchased its 40,000-square-foot, two-story City Hall for $11 million. In the intervening years, said Rioux, property values soared, with City Hall last appraised at $18 million. Some believe prices went up after Google bought eight empty acres on Coromar Drive last November for $16 million — the land apparently has entitlements for 95,000 square feet of building — and construction cost increases made existing buildings more attractive.

Goleta’s lender on the City Hall purchase — iBank, the state’s infrastructure bank — was willing to swap City Hall for the city library and corporation yard as collateral on that loan. “Normally, the encumbered asset would be the project itself, but who would buy a road or a bike path?” said Rioux.

Construction cost inflation graph | Credit: City of Goleta

The weirdness peels down to the lease of Goleta’s City Hall by the city to the GFFA. The newly created GFFA can issue bonds but it needs collateral behind them — real estate is always a good choice. Bonds created, GFFA leases City Hall back to the city, which pays an annual $1.13 million “lease” to a trustee who handles the bond money.

It’s how lease-revenue bonds tend to work, said the very patient Rioux, who is a certified California Municipal Treasurer and knows his bonds. “Lease-backs are like,” he pondered for a minute, “kinda like temporarily leasing your home to a bank to get money for renovations. You then lease it back so you can keep living there. Over time, your lease payments repay the borrowed funds, and at the end of the term, you still fully own your home.”

The Project(s)

On Tuesday night, Councilmember Luz Reyes-Martín, sensitive to the community’s doubts, said it was important for the council to be “very, very clear with the public about what the specific projects are. We must hold ourselves accountable to deliver on the projects as we move down this road.”

To that end, the bond-creation documents will note that in addition to the crib wall and the bike path, elements of the city’s Project Connect — the Ekwill Fowler road extensions and the Hollister Avenue bridge replacement — and the new train station and its street improvements are eligible for the funds. These are all projects approved by SBCAG (S.B. County Association of Governments), which oversees Measure A sales-tax monies.

Before the bond sale takes place next February, the city’s bond rating will be established, and a quantity of contracts and disclosures must be written up and approved at meetings in January. The council also went through an instructional session on Tuesday about disclosing the city’s financial condition and issues, both formally and informally during conversations or speeches.

Futurecast

For investors, the appeal of municipal bonds over corporate stocks is the tax-free aspect, a federal allowance given when the project to be funded is a public good, Rioux explained. Security is added if the city can achieve a high rating from an entity like Standard & Poor’s. But bonds add debt, which the city intends to manage through clearly identified means of payment.

The Measure A revenue bond necessarily has a 15-year lifespan, as the measure sunsets in 2040. Based on market conditions on November 14, 2024, when the staff report was prepared, its estimated debt service is around $5.6 million. For the longer-term, 30-year ground-lease revenue bond, it could be $15 million. Rioux pegged the total interest and fees at around $23.7 million, based on contemporary market conditions, but the city is likely to refinance the bonds after 10 years has passed, reducing that sum considerably.

If the size of these numbers are numbing to the brain, Stuart Kasdin suggested thinking of it in terms of a home purchase: “A good comparison in some ways is, you buy a house, have a mortgage, and pay over time to have a place to live. You could set aside little bits of money over time and wait, but this way you have a house to live in for 30 years. These projects are important, and we want the benefits now and not wait 30 years to accumulate funds and then move into the house.”