Bill aims to bar metro district developers from buying bonds they approved as district directors

Jan. 25—A state lawmaker is yet-again pressing for legislation that would prevent metro district developers from owning their own public financing, largely relying on his nearly successful effort last year to thwart the practice.

Rep. Mike Weissman, D-Aurora, said House Bill 23-1090 aims specifically at a practice that has been a lucrative — yet seemingly unethical — honey pot for developers in Colorado.

"I am bringing back this proposal to prohibit the purchase of conflicted metro district debt because I believe it's too fundamental an issue not to," Weissman told The Denver Gazette. "I am optimistic that my colleagues, including many new members, some of whom I know are concerned about metro district abuses, will see the sense in prohibiting the practice of piling debt on homeowners by people who profit from the purchase of some of that same debt."

While acting as a metro district's board of directors, developers — or those who work for them — approve the public financing needed to reimburse them for their expenses, then purchase that debt for themselves, frequently at much higher interest-rate returns than other forms of financing. Critics say the practice appears unethical, but board members of quasi-governmental metro districts are not subject to state ethics commission scrutiny.

Another bill, HB 23-1065, takes square aim at that loophole.

Attorney Brian Matise, a metro district expert who has been a board member on several and litigated cases against some others, called Weissman's bill "good common sense."

"The argument for metro districts is that they allow for issuance of debt to fund infrastructure at a lower interest rate than otherwise would be available to developers," Matise told The Denver Gazette in an email. "But if the developer is actually funding the development himself or herself by purchasing the debt, then that justification for metro district financing is not applicable."

The metro district residents who eventually buy into the development are required to pay off the bond debt through property taxes. Developers who buy the debt frequently purchase bonds that are not to be paid off immediately — known as subordinate bonds — because they can be enormously profitable, carrying higher interest rates and taking up to four decades to pay back.

Although conflict of interest rules require metro district directors publicly say if they have a conflict — such as working for the developer or being a family member of theirs — there is no requirement to let anyone know when they purchase the public financing they approved.

Developers last year criticized Weissman's efforts, claiming it would dry up public financing available for them to build homes to meet the burgeoning need for housing. They also argued during legislative hearings that buying their own bonds is an iron-clad method of ensuring new houses would get built and to prevent that would make the homes they build more expensive.

The industry is saying much the same about Weissman's latest effort.

Colorado House panel passes bill on metro districts' construction bonds

"The impact of this proposal will have short-term and long-term effects of reducing affordable housing in Colorado," said Ann Terry, executive director of the Special District Association of Colorado. "The prohibition of developer debt will severely limit opportunities to develop a metro district to finance public infrastructure. The proposed legislation would adversely impact future projects and as well as current projects."

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Matise disagreed.

"If the debt is so risky that it can't be sold to financial institutions such as high-yield municipal bond funds — which purchase non-investment grade unrated 'junk bonds' — then it is too risky for the taxpayers to be on the hook for the debt," he said.

Nevertheless, metro district proponents say there is no better choice to meet Colorado's housing needs and that "forcing a top-heavy, one-size-fits-all approach is not a best practice."

"Gov. Polis made it very clear in his State of the State address that solving Colorado's affordability crisis requires a systematic approach," said Kristi Pollard, executive director of the Metro District Education Coalition. "Metro districts are an important part of the affordability puzzle and have helped thousands of Coloradans afford their new homes in communities loaded with new amenities and infrastructure that municipalities can no longer pay for."

Critics have said developers hold all the cards when they form a metro district because they are the only landowners who can be seated on the board of directors that creates the public financing that will pay for the development's infrastructure. Public bond documents later say the financing was approved by a majority of a development's voters, but that's frequently only three or four people who represent the builders since no homes had yet risen or been sold.

The votes of those few people apply to the hundreds of homeowners who will eventually take up residence there.

Weismann's bill last year, HB 22-1363, roller-coastered its way to oblivion, first preventing the practice, then allowing it, then preventing it again. The bill extended to several metro district matters that included the bond-purchase prevention.

After passing the state House, it died a late-night death in a Senate committee as bleary-eyed lawmakers grappled with last-minute changes that ultimately killed it.

It went down in a 3-2 vote by the Senate's state, veterans and military affairs committee.

"There are no regulations to prevent developer-controlled boards from approving arrangements that are financially advantageous to their business," Sen. Tammy Story, D-Conifer, told the committee at the time. "They are completely free to finance over-ambitious plans without fear of liability, knowing future homeowners ultimately shoulder the burden. Homeowners are on the hook for decades paying a completely unnecessary load of bad debt."

Weissman said his latest effort is more streamlined and focused squarely on the debt-buying issue.

"Last year, this proposal was included in a larger bill containing other proposed reforms to the Special District Act" that deals with metro districts, Weissman said. "Also last year, the bill was moving through the process relatively later in the session. This time I am deliberately keeping the focus narrow, and deliberately starting earlier."

The bill is scheduled to be heard by the House Transportation, Housing and Local Government committee on Feb. 7.

Metro district bill dies in late-night committee hearing

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